How To Get A Personal Loan For Business
Startup owners often have a difficult time accessing financing to keep their businesses growing. While it’s becoming easier and easier to get business financing due to online loans, startups have largely been left out of the mix. Business lenders, understandably, don’t want to risk lending to an unproven business with no operating history. There are other types of financing available for new businesses, such as VC funding or loans from friends and family, but many entrepreneurs will not have access to those options.
If you’re in possession of a young business and need financing, here’s an option you might not have considered: using a personal loan for business purposes. Because personal loans rely on your creditworthiness, not the creditworthiness of your fledgling business, they’re fairly easy for some entrepreneurs to obtain.
Is a personal loan the right way to fund your business? Keep reading to find out!
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Personal Loans VS Business Loans
In practice, personal and business loans are very similar. Most loans are installment loans, which means you’ll receive the money as a single sum and repay in fixed, periodic installments. However, there are a few differences that might affect which type of loan is better for your business.
As you might expect, personal and business lenders are looking for different things when it comes to risk analysis. While a business lender is going to look at your business finances, a personal lender is only going to be interested in your personal finances. They will primarily be interested in information such as your credit score, credit history, income, and personal debts. During the loan application process, you will have to provide documents that verify this information.
While businesses can borrow millions of dollars in loans (if they have the means to pay it back), personal loans are typically for much smaller amounts. Most personal lenders won’t lend over a maximum of $40,000 or $50,000. Naturally, the amount you’re offered will depend on your ability to repay the loan. To decide how much you can borrow, the underwriter will look at information such as your income and debts to decide how much supplemental money you have to make loan payments.
The majority of personal loans are unsecured. For comparison’s sake, business loans might require you to put up collateral or sign a personal guarantee. Unsecured loans are considered higher risk than loans secured by specific collateral, which means that they typically carry higher interest rates and fees to account for the additional risk. That said, it is possible to find secured personal loans if you have something you’re willing and able to use as collateral.
When Should I Use a Personal Loan For My Business?
First of all, if you are interested in getting an affordable personal loan, you’ll need to be a creditworthy borrower with a good debt-to-income ratio. If you have a credit score over 600 and a debt to income ratio of 46% or lower, you will have a fairly good chance of qualifying for a personal loan. Don’t meet those standards? Check out our guides on improving your credit score and DTI:
If you do meet those requirements, you have a good chance of qualifying for a personal loan. But should you use a personal loan to fund your business? Here are some common reasons you might use a personal loan for business:
- You don’t yet own a business: If you are in the beginning stages of your business and haven’t yet opened your doors or started generating revenue, you are unlikely to be able to find a business loan. Instead, a personal loan can help you finance startup costs and get your business off the ground.
- You don’t have the time in business or revenue to qualify for business financing: If you are already open for business but don’t qualify for financing due to the age of your business or low revenue, you can use a personal loan to keep things operating while you overcome early-business obstacles.
- Your business is in a risky industry (such as foodservice): Businesses in risky or undesirable industries often have trouble getting a business loan because lenders are afraid they won’t get their money back. Instead, you might find it easier to get a loan that is tied to your personal creditworthiness, not the creditworthiness of your business.
- A personal loan is less expensive: If you have strong personal credit and a low debt-to-income ratio, you might qualify for a personal loan with low rates and fees. This could be a better option than a business loan if your business creditworthiness isn’t nearly as good as your personal creditworthiness.
A final warning before you go down the personal-loan-for-business path: It’s okay to mix personal and business finances in the beginning, but at some point, you’re going to want to separate the two. Even if the funds are technically from a personal loan, I’d advise those that are able to set up a business bank account and exclusively use the loan money for business purposes. This will simplify your taxes and your accounting processes. For more information about the importance of keeping your business and personal finances separate for legal purposes, read 12 Tips For Preventing A Tax Audit.
Personal Loans For Business: Our Favorite Lenders
Ready to take take the plunge into the world of personal loans? Below are three lenders that offer personal loans that can be used for business: Prosper, Upstart, and Avant. Merchant Maverick has reviewed a number of personal lenders, and while there are many worthwhile lenders out there, the three listed below offer reasonable interest rates, a relatively fast and easy application process, and quality customer service.
• Must have a personal credit score of 640 or higher.
• No time in business or revenue requirements.
|Visit the Prosper website|
Read our Prosper review
Founded in 2005, Prosper has over a decade of experience issuing personal loans online. This lender offers personal installment loans with repayment term lengths of three or five years. Currently, APRs range from 5.99% to 35.99%, which is competitive with other personal online lenders. These loans can be used for most personal and business uses.
The application is easy: to check your rate, you simply need to make an account and fill out a short questionnaire. If you like the rates quoted, you will need to submit documents and complete a few other verification steps. However, with a credit score requirement of 640 or above, Prosper is the most difficult of the three lenders to qualify for. If you don’t meet the credit score requirements for Prosper, you might still be eligible for Upstart or Avant.
• Must have a personal credit score of 620 or higher.
• No time in business or revenue requirements.
|Visit the Upstart website|
Read our Upstart review
If you don’t have a very long credit history, Upstart might be the lender for you. Originally founded as a student income share service, Upstart specializes in lending to young adults and other consumers who don’t have perfect credit or an established credit history. To make up for the potential lack of credit history, Upstarts underwriters take many other personal characteristics into account, such as your education and work experience.
Although servicing a younger target audience, Upstart still has competitive rates and fees. You can expect APRs between 7.16% and 29.99%, and term lengths of three or five years.
• Must have a credit score in the range of 600 – 700.
• No time in business or revenue requirements.
|Visit the Avant website|
Read our Avant review
Avant is a personal lender that specializes in lending to consumers with poor-to-fair credit. While they don’t state a minimum cutoff, Avant claims that most borrowers have credit scores in the range of 600 to 700. So, if your credit isn’t quite high enough to qualify for Prosper or Upstart, you might still be able to find luck with Avant.
Although Avant borrowers tend to have slightly lower scores, the lender still offers competitive rates and fees. You can expect APRs between 9.95% and 35.99%. While especially creditworthy borrowers might be able to get a slightly lower rate from one of the above lenders, borrowers will still get fair rates from Avant.
Alternatives To Personal Loans
Before deciding on a personal loan, it might be good to know about your other options. In addition to personal loans for business, business credit cards and CDFIs are viable sources of financing for startups.
Business Credit Cards
Business credit cards are often easier to get than business loans and require less scrutiny of your business. Although most business credit cards require information about your revenue, entrepreneurs can use their personal income instead of, or in addition to, business income. Business credit cards are a good way to manage your money, defer payments to a more convenient time, and start building business credit.
Business credit cards aren’t even just for everyday purchases — many businesses use a credit card with a 0% introductory rate to finance large business projects or purchases, much like a small business loan. One of our favorite business credit cards is Blue Business Plus, offered by American Express, which offers 0% APR for 15 months after signup. For the rundown on other good business credit cards, check out The Best Business Credit Cards for 2018.
Community Development Financial Institutions (CDFIs)
CDFIs (Community Development Financial Institutions), are not-for-profit organizations dedicated to facilitating community growth by loaning to businesses and consumers. CDFIs are often willing to lend to startups, even when the business doesn’t yet qualify for financing elsewhere.
CDFIs typically only serve a small area of the United States, so you’ll need to take a look at the institutions available in your area. Head over to our full article on CDFIs to learn more about these institutions, and where to find lenders if your area.
Personal loans are useful tools for startup owners who are in the beginning stages of their businesses or can’t achieve financing for other reasons. While they are not your only option, personal loans are easy and accessible for many entrepreneurs and business owners.
Ready to find a personal loan? Take a look at the lenders listed above, read Top Personal Loans For Business Compared, or view a comparison chart of some of our favorite lenders for startups.