Consider the Alternatives Before Using a Personal Loan for Business
If you’re launching your own venture or operating a small company already, then yes, you may consider a personal loan for business use instead of a traditional business loan. Personal loans are generally easier to qualify for, but they might be less cost-effective for experienced business owners.
Personal loans and business loans come with various other benefits and drawbacks, so weigh your options and learn about alternatives before borrowing funds for your business.
How to use a personal loan for business costs
Between inventory and limited liability company (LLC) filing fees, business startup expenses can add up. About two-thirds of business owners will need more than $10,000 to start their business, according to a 2020 LendingTree study. Getting a loan to open a business is no simple task, as it can be difficult to qualify for small business loans. That’s one reason why business owners turn to personal loans to cover expenses.
| Lender | APR range | Min. credit score | Best for... |
|---|---|---|---|
| LightStream | 7.49% - 25.49% *with autopay | Good credit required | Wide variety of repayment term durations |
| Upstart | 6.40% - 35.99% | 300 | Borrowers with thin credit histories |
| LendingClub | 9.57% - 35.99% | 600 | Applying with a co-borrower |
| Achieve | 8.99% - 35.99% | 620 | Applicants with excellent credit |
Personal loans are lump-sum loans that are repaid in fixed monthly payments over a set period of months or years. They are typically unsecured, meaning they don’t require collateral, although secured personal loans do exist.
Unlike business loans, personal loans are issued to you as an individual rather than your business. Borrowing a personal loan to pay for business expenses means that you’re putting your personal credit on the line if you can’t repay the loan. Compare your options in the table below:
| Business loan | Personal loan for business | |
|---|---|---|
| What is it? | An umbrella term for loans that are issued to a business, including SBA-guaranteed loans, bank loans and equipment financing, for instance. | A lump-sum loan that’s issued to an individual and is repaid in fixed monthly payments. Personal loans are typically unsecured, which do not require collateral. |
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When is it a good idea to use a personal loan for small business purposes?
- You’ve exhausted other financing avenues, like business loans, business credit cards and crowdfunding. Using a personal loan for startup costs is a potential avenue for funding when traditional business loan requirements are holding you back.
- You have good personal credit and can secure a low APR. You should only take out a personal loan if you can get favorable terms.
- You are confident in your ability to repay the loan. Personal loans are issued to individuals, not businesses. If your business goes under, you’re personally responsible for repaying the loan.
When is it a better idea to use a business loan?
- You’re an experienced business owner sporting strong company financials. If you’re borrowing for a mature business, not a fledgling startup, it could be more cost-effective to take out a traditional business loan if you can qualify for lower rates and friendlier terms.
- You’re intending to borrow a large amount. Personal loans sometimes cap out at six figures, while business loans can offer up to $5.5 million in funding, depending on the loan type.
- You’re borrowing for a specific purpose: Personal loans can be used for a wide variety of purchases, but some types of business loans (such as working capital loans and equipment financing, below) could uniquely suit your borrowing needs.
Pros and cons of using a personal loan for business use
When compared with business loans, personal loans offer fast funding and a simple application process. However, that convenience comes at a cost: When you take out a personal loan to start a small business or pay for business costs, you’re betting your personal credit on the success of your business.
Weigh the pros and cons of using a personal loan for business investment in the breakdown below:
| Benefits | Drawbacks |
|---|---|
| It is easier to qualify for a personal loan than a business loan, particularly for new businesses that can’t get traditional funding. | You’re putting your personal credit on the line. And with a secured personal loan, you would be risking a personal asset if you can’t repay the loan. |
| Personal loans offer fast funding. You will likely get funding within a few days of approval. | Personal loan interest isn’t tax-deductible, unlike business loan interest. |
| Typically, you don’t have to put up collateral like business inventory, although secured personal loans are an option. | Personal loans are typically only worth up to $50,000, although certain personal loan lenders do offer loans for up to $100,000. |
| You can use the funds for virtually anything, including a mix of business and personal expenses. | APRs tend to be higher than they are for business loans. Personal loan APRs typically range from about 5% to 35% or more, but can be higher for subprime borrowers. |
6 alternative ways to finance your business venture
- SBA loans
- Business lines of credit
- Business credit card
- Working capital loans
- Equipment financing
- Crowdfunding
1. SBA loans
SBA loans are long-term, low-interest loans that are guaranteed by the Small Business Administration (SBA). SBA loans may be easier to qualify for than other types of business loans. There are three types of SBA loans: SBA 7(a) loans, DC/504 loans and SBA microloans.
An SBA 7(a) loan can be used for a variety of purposes, including:
- Working capital
- Debt refinancing
- Marketing and advertising
- Hiring expenses
- Tools and equipment
- Franchises and new construction
DC/504 loans are strictly for real estate and equipment purchases. SBA microloans, as the name suggests, come in smaller amounts (up to $50,000).
How it compares to a personal loan: SBA loans have a lengthy application process compared with personal loans, but the extra work could pay off in the form of lower interest rates: SBA loan rates range from 4.75% to 7%. Plus, you’re not putting your personal credit on the line and may be able to borrow more money than with a personal loan.2. Business lines of credit
A business line of credit allows business owners to borrow money on an as-needed basis rather than take out a lump-sum loan. Like a credit card, business lines of credit have a revolving limit. And like business loans, you may need a certain amount of time in business and revenue requirements in order to qualify.
Business lines of credit can be secured or unsecured, although unsecured lines of credit may result in higher interest rates. Plus, you may have to sign a personal guarantee, which means that you’d be personally responsible to repay the amount borrowed if your business goes under.
How it compares to a personal loan: Lines of credit are a flexible financing option that allow borrowers to withdraw money on an as-needed basis, in contrast to personal loans that are issued as a lump-sum amount. However, business lines of credit may be a safer alternative with less personal liability if you can get one that doesn’t require a personal guarantee.3. Business credit card
A small business credit card could be a useful way of funding your short-term business needs, particularly if they’re variable. Credit cards, like lines of credit, are a form of revolving accounts, so you could borrow as needed instead of taking on a larger lump sum. Business credit cards might also come with unique perks, such as additional cards for employees, cash back or other bonuses. Like other types of business borrowing, these cards would also be separate from your personal finances.
How it compares to a personal loan: The floor of APR ranges for business credit cards is higher than that of personal loans, so this could be a less cost-effective option if you can’t zero your balance every month. With that said, the ceiling on APR ranges for these cards are lower than that of personal loans, so it could be worth considering if you don’t have the credit profile to qualify for a loan.4. Working capital loans
If you simply need a loan to hold your business over during a lull, consider a working capital loan. This allows you to borrow from your working capital (your current assets minus your current liabilities). With this type of business loan, you can keep operating during times of reduced business activity and repay the loan when business is back at its peak.
How it compares to a personal loan: A working capital loan is best for an established business that has thorough records of their assets and liabilities. Compared with other types of business loans, working capital loans have fast funding time frames, like personal loans.5. Equipment financing
Business equipment is a large expense, and if your business is just starting out, you might not have the capital to purchase needed equipment like construction vehicles, commercial ovens and manufacturing equipment, for example. That’s where equipment financing companies come in.
Equipment financing is more expensive than simply buying the equipment outright, since you’ll have to pay back the amount borrowed plus interest.
How it compares to a personal loan: Equipment financing is typically secured by the equipment itself, so if you don’t make payments, you will lose the equipment. A personal loan for a business vehicle can be unsecured, meaning you don’t risk losing any assets if you default on the loan. However, you do risk ruining your credit if you don’t repay the lender.6. Crowdfunding
Crowdfunding websites like Kickstarter and GoFundMe allow you to raise business funds from the general public. Commonly shared on social media to reach a wider audience, crowdfunding pages can help small businesses that are struggling to pay for expenses.
Crowdfunding is a savvy option because it’s not a loan that needs to be repaid. However, there’s no guarantee that a crowdfunding campaign will be successful. Plus, you may have to pay taxes on the money you receive.
How it compares to a personal loan: Since crowdfunding is not a loan, the money doesn’t need to be repaid and there’s no interest to pay. Personal loans are a much more expensive alternative to crowdfunding, but it’s less work to apply for a personal loan than it is to run a successful crowdfunding campaign.How to get a personal loan for business use
If you decide to pursue a personal loan over the alternatives listed above, you may be wondering how to apply.
LendingTree’s online loan marketplace is a potential starting point to compare options and shop for the lowest APR for your financial situation. Regardless of where you shop for a personal loan for business use, it’s wise to take the following steps:
- Check your credit: If you’re borrowing a personal loan, it’s your creditworthiness (not your business’s) that will determine the rates and terms for which you qualify. You might take the time to clean up your credit report and improve your score before borrowing. You could also find a cosigner or co-borrower – perhaps your business partner – who’s willing to share responsibility for repayment.
- Prequalify to check eligibility: Reputable online loan lenders allow you to confirm your eligibility and receive a rate quote without incurring a hard check of your credit profile. All you’d need to do is input some basic information about yourself and your desired loan. It’s smart to apply around in this fashion before you make a commitment.
- Compare APRs and terms: Once you have a better idea of your eligibility and potential loan details, you could shop around with additional banks, credit unions or other financial institutions. Make sure to apply within a short period of time to limit any negative impact on your credit report. Also, always compare APRs between lenders, as APR accounts for both the interest rate and any financing fees.
- Select the best loan: Once you’ve found the best possible deal for a personal loan for business use, gather your IDs and financial documents such as pay stubs, tax records and the like. Your prospective lender will likely require uploading images of these documents to verify the information you may have provided during prequalification.
- Close on the loan: In this step, you’ll formalize your loan with your new lender and await funding to your selected bank account. This is the last real opportunity to get your questions and concerns answered before the loan is finalized and repayment commences, so be sure to pepper your lender’s customer service with questions. Then you’ll be in a better position to succeed in repayment.