Can You Get a Personal Loan to Start a Small Business?

Launching a business requires entrepreneurship, vision, dedication, as well as financing. Without sufficient funds, many budding startup founders find financial hurdles overwhelming. If you’re looking to start a small business, consider the various financing options, including the rarer avenue of obtaining a personal loan for your business needs.

Let’s go over the essentials of using a personal loan to start a small business and whether it’s preferable to a business loan.

The financial challenges of starting a small business

Starting a small business comes with a myriad of challenges. Not only are there initial costs such as for equipment, location, licensing, and inventory, but there are also ongoing expenses. You will need to cover payroll, utilities, insurance, marketing, and plenty of other services that enable your business to succeed.

Needless to say, starting a business is expensive. It is invaluable to have funds that serve as a financial cushion for any unexpected expenses that arise. Other than venture capital, accelerators, and other sources of funding, you might also want to consider using a personal loan to start your small business.

Personal loans for businesses can be especially helpful for those who don’t qualify for favorable small business loans. You can use the personal loan funds to cover all sorts of business expenses.

Business loans vs. personal loans

Business loans and personal loans are two different types of financing options for small businesses. It is important to know the difference between business and personal loans before obtaining either one since the financial impact can be long-lasting.

Business loans

Traditional business loans are tailored to help borrowers pay for business expenses. Business loan lenders will mainly assess your business’ creditworthiness, stability, and industry before approving loans.

An advantage of business loans is that they offer higher loan amounts than personal loans. However, the eligibility criteria are stricter. One major disadvantage to business loans is that some businesses and startups don’t qualify for them due to business loan requirements. Here are some common eligibility criteria you might encounter when seeking a business loan:

• Minimum monthly revenue
• Two years in business
• Good personal and business credit scores
• Industry requirements
• Business loan proposal and repayment planning

While business loans can be a valuable source of financing, your preferred lender or bank may not allow you to take out a business loan if your business does not meet the requirements.

Personal loans

Personal loans don’t usually require you to have any specific loan purposes. It’s quick and easy to apply for a personal loan and receive the loan funds for your needs. Borrowers use personal loans for a multitude of reasons, from consolidating debt to paying for weddings.

Compared to traditional funding strategies, personal loans for business purposes are usually more convenient, quick, and easy to obtain. Finding a suitable lender can help you secure the funds that you need for both short-term and long-term business goals.

It’s important to note that some lenders do not allow you to use personal loan funds for business purposes. Because of this, it is a good idea to research your options before putting in an official loan application so that you don’t waste time or go through unnecessary credit inquiries.

Diving into personal loans

If you successfully obtain a personal loan, the lender will disburse the approved loan amount into your bank account as a lump sum. You can then use these funds for a wide variety of purposes, and many lenders let you use them for business expenses.

Here are the main advantages of using a personal loan to start your business.

Easy approval process

If you don’t have an existing business credit history, it can be difficult to secure a small business loan. Personal loans have more lenient eligibility requirements and the approval process is easier to understand.

Faster funding

Compared to other funding options, using a personal loan for your business expenses is often the fastest and most straightforward method. You don’t need to create a pitch to persuade investors and you don’t need to give away ownership of your company. A personal loan allows you to relatively quickly receive the funds that you need to set your business up for success.

If you need fast funding for important business expenses, personal loans are an accessible way to address your urgent needs.

Flexible fund usage

Personal loans are highly flexible since there are very few purposes for which you can’t use the loan funds. This means that you can use the funds for the initial costs of starting your business, ongoing expenses, and any other bills that you need to pay in order to keep your startup running.

Key eligibility criteria

Lenders look at different factors, varying based on which lender you choose. Here are some of the most common factors that lenders take into consideration when evaluating your personal loan application.

• Income stability
• Credit score
• Credit behavior
• Debt-to-income ratio
• Credit utilization
• Loan purpose

Pros of using personal loans to fund a small business startup

If you’re trying to choose between personal loans and other methods to fund your small business startup, here are some of the top benefits of using a personal loan.

Personal loans grant you funds quickly and easily

Personal loans are a relatively convenient way to fund your small business. If your startup needs extra cash flow, you should consider the value of using personal loans for your expenses.

You don’t need to give away equity

A potential downside to receiving funds from other sources is that you might need to take on additional business partners or give away ownership equity. This means that obtaining a personal loan for your business expenses could help you maintain majority ownership of the company.

Simplified financial planning

Financial planning is a crucial part of any business. From minor to major expenses, the more prepared and organized you are, the more efficiently you can run your business. If you’re struggling with financial planning, you can leverage the simple structures of personal loans.

Most personal loans have fixed interest rates and clear repayment schedules. These make it easier for you to budget for business expenses every month.

Fewer restrictions and limitations

Compared to business loans, personal loans can provide you with significantly more freedom regarding how you can use your funds. While you will encounter restrictions in business loans, these same restrictions are typically not found in personal loans.

Considerations before using a personal loan for business purposes

While personal loans can be incredibly convenient and helpful for business purposes, it’s still essential to understand the potential risks and drawbacks. Here are a few of the factors you should keep in mind when considering a personal loan for your startup.

Personal financial risk

When you take out a personal loan instead of a business loan, you will be individually responsible for repaying the loan. This means you will need to make regular, on-time installments according to the designated loan terms. Regardless of how your business fares, it will be you who is legally required to repay the loan.

If you default on an unsecured personal loan, the lender may send your loan to collections, resulting in a debt collector pursuing you for the repayment of the outstanding balance. Meanwhile, if you took out a secured personal loan, a loan default can result in your collateral assets being repossessed.

In some cases, defaulting on a loan means you may be taken to court and sued, potentially resulting in wage garnishment or other consequences.

Total cost of borrowing

You need to understand the total borrowing cost, not just the interest rate. Look at the annual percentage rate (APR), which takes into account the interest rate, discount points, additional fees, as well as other relevant costs.

Credit score impact

Taking out any sort of loan can affect your credit score. Each hard credit check in the personal loan application process can dip your credit score by around five points. After obtaining a loan, if you fail to adhere to the repayment terms, you can seriously damage your credit score. Missing a payment or defaulting on the loan can reduce your credit score by over 100 points.

If you do use a personal loan for business expenses, make sure you understand that your personal credit score can be affected.

Long-term effect on your business

While it is common for businesses, especially fresh startups, to be in debt, it is advisable to consider both the short-term and long-term effects of having a personal loan debt while running a new business. Needing to pay regular installments may put a degree of financial strain onto your shoulders, on top of the other business and personal needs you need to meet.

Alternative funding options for small business startups

If neither business nor personal loans sound suitable for your small business, consider the following alternative funding options.

Venture capital and angel investors

Venture capital involves selling ownership stakes to a venture capital fund. In exchange, you can obtain financing, expert support, and other valuable assistance.

Angel investors are individuals who can provide you with enough initial seed money to get your business off the ground. The investors will receive something in return, such as ownership equity. You can receive help in getting a product to market and valuable guidance. But first, you need to be able to sway an angel investor to invest in you and your ideas.

Crowdfunding

Many new businesses, especially those with interesting stories or niches, can benefit from crowdfunding platforms. Kickstarter, Indiegogo, and GoFundMe are popular crowdfunding platforms.

For crowdfunding, you will typically need to create a compelling campaign that conveys the vision of your business. A strong founder story and marketing capability can enable successful crowdfunding. The downside to crowdfunding is how unreliable it can be, and it can be complicated to navigate community sentiment around your business.

Business grants and competitions

Some founders might want to pursue business grants or competitions in order to receive funding. One example of a competitive program that supports small businesses is the Small Business Innovation Research Program (SBIR). However, grants and competitions see many eager applicants every year, making it difficult to win funding unless you have an excellent proposal.

Business credit cards

Just like individual credit cards, business credit cards can be a convenient way to help you pay any business expenses that are too expensive upfront. Credit cards also often come with cash back, bonus points, and other benefits such as promotional annual percentage rates (APRs). Depending on the card issuer, you may be able to prevent the standing of the business credit card account from affecting your personal credit score.

The downside to using a business credit card account is that credit cards typically have much higher interest rates than personal loans. In addition, if you want the best business credit card, you will need a credit score of at least 700. If you can’t manage the business credit card debt, it can easily plunge you into a tricky financial situation while hurting your credit score.

Resources and further reading

Here are several lenders known for offering personal loans that can be used for business purposes.

• Credible
• Monevo
• Upstart
• Avant
• Rocket Loans
• BadCreditLoans.com
• Fiona

Before making your choice, research competitive lenders to see which one aligns with your business needs and priorities best.

Want to compare more options? Here are some more top lenders.

About The Author

Ru Chen

Content Writer

Ru Chen is a content writer with several years of experience in creating engaging and well-researched articles. She mostly writes about business, digital marketing, and law. In her free time, she can be found watching horror movies and playing board games with her partner in Brooklyn.

Articles by Ru Chen

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