Personal loan for business: what you should know
You may use a personal loan for business, but you should know the risks
You might consider using a personal loan for your business if you can’t get any other type of financing, you can afford the payment and you need the funds fast.
However, while it’s easier to qualify for personal loans, they may be less cost-effective for business owners, since they often carry higher annual percentage rates (APRs). Plus, there’s more risk because you’re personally responsible for repaying the loan if your business can’t do so.
A business loan is a better long-term financing option. Even if you initially get a personal loan for your business, you should eventually transition the financing into a business loan.
- Many lenders allow you to use the proceeds from a personal loan for any purpose, including to pay for business expenses.
- It’s easier to qualify for a personal loan, and you’ll usually get funded faster than a business loan, but it’s riskier since you’re responsible for repaying it personally
- If you get a personal loan for your business, only use it to pay for business expenses. You shouldn’t commingle personal and business funds.
What is a personal loan for businesses?
A personal loan is financing provided to an individual consumer. It’s generally unsecured and repaid in fixed monthly installments over a short period (24 to 84 months). Many personal loan companies allow you to use the loan proceeds to pay for virtually anything. So, unless your lender prohibits it, you can use a personal loan to fund your business.
That said, if you decide to use a personal loan to fund your business, you’re putting your personal credit on the line. You’re responsible for repaying the personal loan no matter what happens to your business. If your business can’t afford the loan or closes, you’ll have to make the payments on your own or risk harming your personal credit and reputation.
How can I use a personal loan for business expenses?
Tell your lender upfront that you plan to use personal loan funds for your business so you know if it’s allowed. Once the loan is approved and funded, you may use the proceeds to pay for your business expenses.
A couple of well-known lenders offering personal loans you can use to cover business expenses are Upstart and FreedomPlus.
Personal loans versus business loans
A business loan provides financing to companies to pay for business expenses, fund large purchases or even cover short-term working capital needs. The requirements to qualify for a business loan vary by lender and loan type. However, most lenders evaluate the business’s repayment capacity, capital, credit history and collateral when reviewing a loan for approval.
When considering a loan, make sure to compare the pros and cons of both personal loans and business loans.
The primary source of repayment for most business loans is the cash flow the business generates. By contrast, personal loans are primarily repaid with cash from individual borrowers (e.g., job income). When reviewing your application for a personal loan, lenders evaluate your credit history, credit score, income and debt-to-income (DTI) ratio.
Many people generate cash flow and spend their money similarly, such as earning W-2 income from an employer and getting financing to buy a home or pay for large purchases. That makes it relatively easy for lenders to use automated processes and tools to analyze the average person’s ability to repay a personal loan.
By contrast, businesses generate cash flow and spend money in different ways. Unless the business size or loan amount is relatively small, humans must manually analyze and review many business loans. As a result, getting a business loan is more time-consuming and difficult than getting a personal loan.
Personal loan considerations
- You could get approved for a loan in a few days. Many lenders use automated approval systems and criteria to evaluate if you meet personal loan criteria. Plus, many personal loans are unsecured, meaning they don’t require collateral. That means you may be able to get approved and funded in a matter of days.
- Personal loan APRs are often higher than business loan APRs. Since most personal loans rely solely on your ability to repay the loan using your own cash flow, these loans are considered riskier than many business loans. You’ll pay a higher APR to compensate the lender for the additional risk.
- You’re responsible for repaying a personal loan if your business fails. No matter what happens to your business, you’re responsible for repaying the money you borrow using a personal loan. That means you’re putting yourself at greater risk if you fund your business with a personal loan rather than a business loan.
Business loan considerations
- Unless the loan is very small, you’ll usually need to provide collateral. Most lenders require you to pledge some or all of the business's assets as collateral for a business loan. The collateral provides the lender additional protection if your business can’t repay the loan.
- You may be able to borrow more money with a business loan. Since most business loans require collateral, you may be able to borrow more money than you could with a personal loan. Also, since repayment primarily depends on the cash flow the business generates, larger loan amounts are often available, even if there’s no collateral.
- Most small-business owners are required to provide a personal guarantee. Lenders usually require owners with at least 20% to 25% ownership (or a controlling interest in the business) to personally guarantee they’ll repay the business loan if the business doesn’t. So, expect to provide details about your personal and business finances when you apply.
- A business loan’s APR may be lower than a personal loan’s. You’ll often get a lower APR on a business loan than a personal loan because the lender can rely on multiple sources of repayment (business cash flow, collateral, personal guarantors). As such, business loans are sometimes seen as less risky and thus carry lower APRs.
- Personal liability is often limited on a business loan. Depending on the loan's terms, your personal liability is sometimes limited on a business loan. For example, unless you’re a co-borrower on the business loan, you may only be required to repay the loan if the business fails to do so and there isn’t enough collateral to pay off the loan balance.
- Business loan approval could take up to 30 days. The lender evaluates many things when reviewing a business loan. It’s not unusual for the approval process to take up to 30 days for a business loan, especially if the lender takes collateral or shores up the loan with a government guarantee (for example, from the Small Business Administration).
When should I use a personal loan for my business?
You might consider using a personal loan for your business when you’ve exhausted all other financing options, you can easily handle the payment and your credit is good enough for a decent APR. You may not qualify for a business loan if your business is a small startup.
Remember, it’s best to separate your business and personal finances. You need to be able to separately identify and track your business and personal expenses so you can see how much money your business makes and spends. You should only get a personal loan for your business if you plan to use it solely for business purposes.
Also, consider how you’ll generate the cash needed to repay the debt. J. David Bennett, a certified public accountant and founding member of Renaissance CPA Group, said: “Cash flow should consider not only the amount of funds generated, but if the funds generated will match the timing of the required payments. … Borrowing from credit cards with a monthly payment could put a company’s continuing operations ability in jeopardy if [the business uses] the loan proceeds for long-term investments.”
For example, if you’re only generating enough cash flow to make the minimum payments on a credit card, you’ll never be able to pay off the principal balance. You will pay more interest in the long run and fall into a debt trap.
Short-term debt should be used for short-term expenses (e.g., using a credit card to pay for travel expenses). Long-term debt should be used for long-term expenses (e.g., using a loan to purchase a vehicle).
Alternatives to personal loans for businesses
There are many business funding options if you don’t want to use a personal loan. Some of the most common alternatives include:
- Crowdfunding: Crowdfunding raises funds for your business through small investments from a large group of investors. This is a common option for startup companies, since each investor only risks losing a minimal amount of money if the business fails.
- Equipment financing: If you need to buy a vehicle or equipment, many lenders have specific equipment financing programs to help you do so quickly. These loans are similar to a personal auto loan in that you pledge the equipment as collateral and pay the loan back over a period matching the equipment’s useful life (e.g., five years).
- Business credit cards: You can get a credit card specifically to pay for routine business expenses, like travel costs, meals, entertainment and fuel. You can give business credit cards to employees and may even be able to place controls and limits on how they use the cards to protect your business from fraud.
- Business lines of credit: A business line of credit is an excellent option if you need access to money you can borrow and repay repeatedly. While these loans are sometimes unsecured, you may be required to pledge all business assets or your accounts receivable and inventory as collateral.
- Working capital loans: In some situations, you may need financing specifically for your working capital needs, meaning the funds you need to pay your current liabilities and keep your business going. Many lenders offer short-term working capital loans (e.g., for accounts receivable or inventory you can quickly repay) and long-term permanent working capital loans (e.g., for operational business expenses you need to repay over a longer period of time).
- SBA loans: If your business is small or relatively new and can’t qualify for a business loan, you might be eligible for an SBA loan. With an SBA loan, the Small Business Administration guarantees the lender that it will cover a portion of your loan balance if you don’t repay the loan as agreed.
If you don’t know where to begin, a local SCORE business mentor is a great place to start. The SBA offers free business mentoring through its SCORE program to help small-business owners with many aspects of their business, including creating business plans and finding financing.
Can I use a personal loan to pay for any business expenses?
Some lenders allow you to use a personal loan to pay for business expenses. Others don’t. If you intend to use the funds to pay for business expenses, look for a personal loan that allows you to use the proceeds for any purpose.
What credit score do I need to get a small-business loan?
As a business owner, you’ll generally need a credit score of 620 to 700 to qualify for a small-business loan. The primary source of repayment for a small-business loan is income generated by your business. However, lenders also consider the owners’ credit scores since the finances of small businesses and their owners are typically closely connected.
What is the best way to fund a small business?
While the best way to fund a small business is self-funding with cash, this isn’t always possible. Other good small-business funding options include getting a business loan from a bank or online lender, using crowdfunding or getting an SBA loan. You might be able to use a personal loan to fund your business, but this can be dangerous since your personal finances are at risk.
- U.S. Small Business Administration, " SCORE Business Mentoring ." Accessed Dec. 21, 2022.
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