How To Get A Personal Loan To Start A Business
Can you use a personal loan to start or fund a business? Personal loans for business use are surprisingly easy to get, if you know where to look.
Getting a personal loan to start a business can be an effective way to get financing without a business history.
Even if you have a steady income and a high personal credit score, additional requirements such as time in business or a business credit score make it a tough task to get access to the best business loans. This can be a problem, particularly for startups. Using a personal loan for business allows you to bypass some of these restrictions to get financing for your business.
Table of Contents
- Why Use A Personal Loan To Start A Business?
- Personal Loans For Business VS Business Loans
- How To Get A Personal Loan To Start A Business
- How To Use A Personal Loan For Business
- When To Use A Personal Loan For Your Business & When To Avoid It
- Next Steps: Where To Find Personal Loans For Your Business
- FAQs About Getting A Personal Loan For Business
Why Use A Personal Loan To Start A Business?
Many personal loans can be used for business expenses. Business loans typically require at least 6 months of business history, with many banks and conservative lenders requiring as long as two years. Unlike business loans, personal loans do not have a “time in business” requirement.
Instead, a personal loan tends to emphasize personal creditworthiness.
Personal Loans For Business VS Business Loans
|Personal loans||Business loans|
|Borrowing amounts||Generally low||Can be low or high|
|Credit check||Yes||Usually (credit score requirements may be low)|
|Minimum time in business||N/A||At least 6 months|
|Can be used for business expenses||Yes (check with lender)||Yes (some may have restrictions)|
|Liability||Personal assets||Business assets|
In structure, 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 it in fixed, periodic installments. However, there are a few differences that might affect which type of loan is better for your business.
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 safely borrow, the underwriter will look at information such as your income and debts to determine how much supplemental money you have to make loan payments.
Personal loans, as you might expect, tend to be very concerned with your personal creditworthiness. This is also often true of business loans, but some lenders and loan types are more concerned with things like cash flow, credit card sales, or unpaid invoices.
Personal loans for business work best for borrowers with good credit, as they’ll be able to borrow more, borrow more easily, and borrow at a better interest rate.
Minimum Time In Business
Business lenders generally want to see that you can keep your venture going before they extend you credit. Lenders offering the best interest rates will want to see at least two years of business history. Even most alternative lenders want to see at least three months.
Personal loans, on the other hand, have no business-related requirements.
Can Be Used For Business Expenses
Many personal loans can be used for business expenses, but you’ll want to check with your lender to make sure you don’t violate any of their policies.
While business loans are, obviously, used for business expenses, some types of financing can have restrictions on how those funds can be spent. Equipment financing, for example, can only be used to acquire hard assets.
Collateral Needs & Liability
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.
How To Get A Personal Loan To Start A Business
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.
You can look up your score on one of the best free credit score sites. Don’t meet those standards? Check out our feature on personal credit scores explained. We can also help you get a sense of how long it takes to improve your credit score. It helps if you know how to calculate and lower your DTI.
What Documents Do You Need To Get A Personal Loan For Business
If you do meet those requirements, you have a good chance of qualifying for a personal loan. When you apply for a loan, your lender requires personal information, including your full legal name, Social Security number, and contact information. You will also need to prove your income and creditworthiness by providing documentation, including:
- Personal Income Tax Returns
- Personal Credit Score & Report
- Bank Statements
How To Use A Personal Loan For Business
Assuming that your lender doesn’t have any restrictions on using a personal loan to start a business, you can use a personal loan for just about any business expense.
Whether you own an established business or your company is just an idea that hasn’t yet come to fruition, there are many ways that you can use a personal loan to fund business expenses.
When To Use A Personal Loan For Your Business & When To Avoid It
You can use a personal loan to fund your business, but the question is: should you? There are circumstances where personal loans for business use make the most sense and others where another financial product is advisable.
Use A Personal Loan For Business If…
- 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 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.
- You’re 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.
- Personal Loans Are 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.
Don’t Use Personal Loans For Business If…
These are all good reasons for considering a personal loan for business. However, there are also situations where another financial product would be a more suitable choice for your business.
- Your Business Needs A Lot Of Capital: If your financial needs exceed $100,000, a personal loan won’t be sufficient to cover those needs. Personal loans have lower maximum borrowing amounts than business loans and other financing options. If you have higher capital needs, consider applying for a Small Business Administration loan, which has limits up to $5 million.
- You’re Applying For A Mortgage, Car Loan, Or Other Personal Financing In The Near Future: Taking a personal loan for business raises your debt-to-income ratio, which may make it more difficult (or even impossible) to qualify for additional financing until you pay down your debt. If a personal mortgage, vehicle loan, or other type of financing is in your future, you may want to reconsider adding to your debt with a loan used for your business. It’s also important to remember that making a late payment, missing payments, or defaulting on the loan will impact your personal credit score, so make sure to make all payments as scheduled.
Next Steps: Where To Find Personal Loans For Your Business
Once you’re ready to apply for a personal loan for business, it’s time to find the most affordable personal loan with terms that work best for your financial situation. You can get started with our picks for best personal loans for small business.
Looking for alternatives to personal loans for business? Check out our picks for best small business grants.