Should You Get a Personal Loan to Start Your Small Business or Startup? Pros and Cons

Taking out a personal loan to start a business can provide the financing you need to get your startup off the ground.

You can often borrow up to $100,000 with rates that might range from around 7% to 36%.

But is this the right type of loan for you? Are you eligible? And is it even a good idea?

We’ll walk you through everything you need to know. 

Table of Contents

1. Should you take out a personal loan to start a business? 
2. Is it a good idea to take out personal loans for an existing business?
3. How to apply for a personal loan for a business
4. Best personal loans for business 
5. Alternatives to personal loans for businesses 

Is it a good idea to get a personal loan to start your business?

You meet the eligibility requirements

To qualify for a personal loan, you’ll need to meet a lender’s criteria for personal credit score, income, and debt-to-income ratio. By contrast, most business lenders require that you’ve been in business for a year or longer, make a minimum annual revenue, and in some cases, have a certain business credit score. Qualifying for a business loan may not be possible if you haven’t started your business yet.

Flexible loan use

Because you can use personal loans for almost anything, you can put the funds toward various expenses that go into starting a business, such as applying for licenses, purchasing equipment, or renting office space. Some business loans have more restrictions—for example, an equipment loan has to go toward buying equipment. 

Fast funds

Some lenders offer same-day or next-day funding, so you can access your loan funds in a short amount of time. 

No collateral

Most personal loans are unsecured, so you don’t need to put up collateral to borrow. 

Repayment terms work for you

You can often choose terms of one, three, five, or seven years, but your options may vary by lender.

I suggest having a business plan in place and consulting with a small business advisor to assist with preparing this, which should include budgeting and projecting the amount needed and repayment plans.

Erin Kinkade, CFP®

How about for my existing small business?

If you’re already running your small business and need financing to cover operational costs, a personal loan could make sense. You could use a personal loan to cover a gap in cash flow, cover payroll expenses, buy inventory or equipment, or use it for another purpose. 

A personal loan might be your best option if: 

• You want a streamlined application process: Applying for a personal loan can be a straightforward process. You won’t need to provide your business plan, licenses, or other business documentation as you would with a business loan. You can often complete a personal loan application with basic details and a few personal documents to verify your income and identity. 
• You don’t need a large loan amount: If you need $100,000 or less to operate your small business, a personal loan could make sense. If you need a large loan, consider a business loan or SBA loan, which can offer millions of dollars in funding. 
• You’re not looking for lengthy repayment terms: Along similar lines, a personal loan could be worth exploring if you’re comfortable paying it back within seven years or fewer. For longer terms, consider a business loan—an SBA 7(a) loan, for example, can span up to 25 years. 
• You’ve compared all your options: It’s important to research all your financing options before taking out a personal loan. A business loan, for instance, might have a lower interest rate. 

A personal loan might not make sense if you need to borrow more than $100,000, want repayment terms longer than seven years, or could qualify for a more affordable business loan or line of credit.

How to apply for a personal loan for a business

If you’re looking to apply for a personal loan for a business, here are the steps you’ll take in most cases: 

1. Review your credit: Your credit score affects your chances of loan approval as well as your rates, terms, and loan amount. You can check your score with a free credit monitoring service. Your credit card company or bank might also offer this ability. If your score is low, consider improving it before you pursue a loan or apply with a cosigner. 
2. Shop around with lenders: Compare options from multiple lenders so you can find the loan with the lowest costs of borrowing. Many lenders let you prequalify online. With prequalification, you can check your personal loan rates without hurting your credit score.
3. Compare your options: Look for a loan with a low interest rate, and keep an eye out for fees that could add to your costs. Consider your options for repayment terms, and be sure you can afford monthly loan payments. Using a personal loan calculator can help clarify your overall costs. 
4. Submit a loan application: Once you’ve selected a loan offer, you’ll fill out your loan application. You’ll provide your personal and financial information and specify what you’ll use the personal loan for. Plus, you’ll provide verifying documentation, such as your ID and pay stubs. 
5. Close on your loan: The lender will review your application and run a hard credit inquiry to check your credit. If your loan is approved, you’ll sign your final loan agreement and receive your funds. You can put the loan toward your business expenses and pay it back on your agreed-upon terms. 

Alternatives to personal loans for businesses 

Personal loans can be a flexible, accessible solution for financing a business—especially for newer businesses or entrepreneurs who don’t yet qualify for more traditional funding. That said, personal loans aren’t always the best choice, and comparing them to other options can help you decide.

Here’s how personal loans stack up against other funding types, and how to know when they’re the right move for you.

Personal loans vs. small business loans

Small business loans are specifically designed for business purposes, often offering lower interest rates and higher borrowing limits than personal loans. They’re a great choice for established businesses with a proven track record of profitability and strong credit.

Personal loans, on the other hand, are easier to qualify for since they don’t require business credit or proof of profitability. They also come with a faster, less complicated application process.

Who should consider a personal loan over a small business loan?

• Entrepreneurs who are just starting out and lack a financial history or business credit.
• Individuals who need fast funding without the lengthy application and approval process.

Personal loans vs. business lines of credit

A business line of credit offers ongoing access to funds, making it a great option for covering fluctuating expenses or managing cash flow. You only pay interest on what you borrow, which can make it more cost-effective for variable needs.

However, lines of credit usually require a solid business credit history and can take longer to secure than a personal loan. Additionally, they may have lower borrowing limits than a personal loan.

Who should consider a personal loan over a business line of credit?

• Business owners with a specific, fixed funding need, like purchasing equipment or launching a product.
• Entrepreneurs without established business credit or who need a faster approval process.

Personal loans vs. business credit cards

Business credit cards can be a handy tool for managing smaller, short-term expenses and often come with rewards like cashback or travel points. But high interest rates and the risk of debt spiraling if balances aren’t paid in full can make them less ideal for larger, long-term financing needs.

In contrast, personal loans provide structured repayment plans with fixed interest rates, giving you more control over long-term costs.

Who should consider a personal loan over a business credit card?

• Entrepreneurs with significant expenses they want to pay off over time.
• Those who prefer predictable payments and lower interest rates for larger purchases.

Personal loans vs. crowdfunding

Crowdfunding offers the unique advantage of raising funds without incurring debt, while also generating excitement for your product or service. However, not all campaigns succeed, and creating a compelling pitch can be time-intensive.

Personal loans provide guaranteed funding, which can be a lifeline when you need money quickly or don’t want to share your business plans publicly.

Who should consider a personal loan over crowdfunding?

• Entrepreneurs who value immediate, reliable funding with less uncertainty.
• Those who lack the time or resources to manage a crowdfunding campaign.

How to decide: is a personal loan right for you?

The best funding option depends on your unique needs, timeline, and eligibility:

• Consider a personal loan if… you’re in the early stages of your business, need quick funding, or prefer the simplicity of a straightforward loan process.
• Choose a small business loan if… you’re eligible for better rates and need a larger amount for long-term growth.
• Opt for a line of credit if… you want flexible, ongoing access to funds for variable expenses.
• Use a business credit card if… your funding needs are short-term and you can benefit from rewards.
• Try crowdfunding if… you’re comfortable with uncertainty and want to avoid debt.

By understanding the pros and cons of each option can help you ensure a personal loan is the right funding method for your business.

How we chose the best personal loans for business

Since 2017, LendEDU has evaluated personal loan companies to help readers find the best personal loans. Our latest analysis reviewed 1,029 data points from 49 lenders and financial institutions, with 21 data points collected from each. This information is gathered from company websites, online applications, public disclosures, customer reviews, and direct communication with company representatives. These star ratings help us determine which companies are best for different situations. We don’t believe two companies can be the best for the same purpose, so we only show each best-for designation once.

Recap: Best personal loans for business

Lender	Rates (APR)
Credible	7.49% – 35.99%
Upgrade	8.49% – 35.99%