Using a Personal Loan for Your Business: Is it a Good Idea?

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Personal loans are commonly used by individuals to consolidate high-interest credit card debt, pay for home improvement projects or pay unexpected expenses. However, most personal loans can also be used for business expenses. In this article, we investigate when it makes sense to use a personal loan and what alternatives a business owner should consider.

Can You Use a Personal Loan for Your Business?

In most cases, yes. Most lenders will let you use a personal loan for almost any purpose, which includes paying for business expenses or starting a company. However, some lenders may have restrictions on how funds can be used, so it’s best to check with your lender to make sure. If they won’t allow you to use the funds for business purposes, there are many other lenders on the market that will.

Personal loans are installment loans that you pay back over a fixed period of time, usually with monthly repayment. Most personal loans are unsecured, meaning you do not need to put up collateral to get the loan. You can typically borrow up to $40,000 through a personal loan, though we have also seen loans of as much as $100,000. Annual percentage rates (APRs) on personal loans range from 5% to 36%. These rates are comparable to the rates on traditional business loans, and in some cases are even lower than the rates for online business loans. In addition, qualifying for a personal loan is based on your personal finances and credit history, not those of your business, which makes them a popular option for startups and businesses that can’t otherwise get funding from conventional sources.

Pros and Cons to Personal Business Loans

Whether a personal loan makes sense for your business will depend on a variety of factors, including your business’s finances, your personal credit history, and how much you plan to borrow.

Advantages

  • Personal loans are easier to qualify for than a business loan, as a lender will only rely on your finances and credit history as an individual. Because a lender only uses your personal information, personal loans can be a good option for new businesses that lack the credentials to get traditional funding.
  • The repayment of a personal loan is usually done monthly, which may allow for easier budgeting than the daily or weekly repayment that many online business lenders require.
  • Lenders are flexible in how you use the funds, which means you can split the money as you wish between business and personal expenses, or any other needs. This can make personal loans good options for the self-employed or sole proprietors.
  • You can get a low annual percentage rate if you have a good to excellent personal credit score. Many personal loan providers have APRs as low as 5.99% or 6.99%. For comparison, many online business lenders have rates starting at 10% or 20%.

Disadvantages

  • You won’t be able to borrow as much with a personal loan as with a business loan. Personal loans typically range up to $40,000, with only a few lenders offering up to $100,000. With a business loan, you can borrow as much as you need, up to millions of dollars.
  • You’ll damage your personal credit if your business cannot repay the loan. Any late or missed payments on a personal loan will be marked on your personal credit report. Some business owners may prefer not to commingle their business and personal finances.
  • In the case that the personal loan is secured, you will be risking your house, car or other personal assets if you cannot repay. If you go into default on the loan, your lender will have the right to seize or foreclose on those assets.
  • Interest on personal loans isn’t tax deductible. The Internal Revenue Service (IRS) lets business owners take a deduction on interest from business loans, but this is not the case with personal loans.

Where to Find Personal Loans

Banks and credit unions: Your bank or credit union may offer personal loans and lines of credit. Some banks, including Wells Fargo and PNC Bank, even have savings- and CD-secured loans, which use your qualifying savings or CD account as collateral for the personal loan. In most cases, you’ll need to be a member of the bank or credit union to get a personal loan, and some banks require you to complete an application in-person.

Online lenders: You can also find personal loans online, and for many borrowers this may be the best option. Most online lenders offer loans with rates equal to or lower than those offered by banks and credit unions. You can also check your rate online before applying for a loan, which makes it easy to shop around for the best deal, and the application process is entirely online.

Alternatives to Consider

Bank loans: Most banks and credit unions offer small business loans and lines of credit, and they often have the lowest interest rates. While qualifying for a bank loan is often harder than for other types of business financing, you can make the process easier on yourself in a few ways. First, start with a bank or credit union with which you already have a good working relationship. If you’ve used the institution in the past for personal or business accounts and loans, your banker may be more motivated to push your application through the loan committee. Second, make sure to thoroughly prepare for the process by putting together a solid business plan with sound financial projections. Finally, be prepared to approach other lenders if your bank does not approve your loan application. Sometimes it’s a matter of finding a lender that is looking for a borrower like you.

SBA loans: SBA loans are another excellent option for small business owners. Because these loans are backed by a guarantee from the Small Business Administration, they are easier to qualify for than a bank loan, yet still carry very competitive terms. For borrowers with established businesses, we recommend the 7(a) loan program for general business needs and the 504 loan program for real estate purchases. For borrowers with startups, we recommend the Community Advantage program and the microloan program.

Online business loans: If you cannot qualify for a bank or SBA loan, or if you need money very quickly, you should consider an online business loan. While online lenders generally charge higher interest rates than banks, they have comparatively lax eligibility requirements and streamlined application processes. In some cases, you can be approved and receive funds within one to two business days.

Small business credit cards: As with personal loans, applying for a small business credit card is based solely on your personal credit history. And like most consumer cards, small business credit cards generally provide sign-up bonuses and points or cash back on purchases. Some of these cards even offer introductory 0% APR periods, which can make them a more attractive financing option than a personal loan. However, we of course don’t recommend getting a credit card if you can’t use it responsibly.

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