How To Get A Personal Loan For Your Small Business & When To Do It
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.
If you’ve had trouble meeting the qualifications to get a business loan, you may want to consider using a personal loan for business.
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 a business loan. 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
- Ways To Use Personal Loans For Business
- How Do Personal Loans Compare To Traditional Business Loans?
- When To Use A Personal Loan For Your Business & When To Avoid It
- What You Need To Qualify For A Personal Business Loan
- Alternatives To Personal Loans For Business Startups
- Next Steps: Where To Find Personal Loans For Your Business
- FAQs About Getting A Personal Loan For Business
- Can a business owner get a personal loan?
- Can you use a personal loan for a business expense?
- Which loan is best for business?
- How hard is it to get a $6,000 loan?
- Can you use a personal loan for a business startup?
- How can I get a loan to start my own business?
- How big of a loan can you get to start a business?
- Should you get a personal loan to start a business?
- How Easy Is It To Get A Personal Loan For Business Use?
Ways To Use Personal Loans For Business
Assuming that your lender doesn’t have any restrictions on using a personal loan for business purposes, 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.
How Do Personal Loans Compare To Traditional Business Loans?
- No Time In Business Needed
- No Minimum Business Revenue Needed
- Can Be Used For A Variety Of Purposes
- Usually Has Low Borrowing Amounts
- You’re Personally Liable In Default
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 it in fixed, periodic installments. However, there are a few differences that might affect which type of loan is better for your business.
Which Is Riskier, A Personal Loan Or A Business Loan?
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 look at 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.
Borrowing Amounts Compared
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.
Collateral Needed For Personal Loans
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 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.
Keeping Your Business & Personal Finances Separate
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..
What You Need To Qualify For A Personal Business Loan
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.
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
Alternatives To Personal Loans For Business Startups
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.
For the rundown on other good business credit cards, check out our comparison of the best business credit cards.
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 what CDFIs are and how they work to learn more about these institutions, and where to find lenders in your area.
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. Start by shopping around for a lender, beginning with these options.
With Prosper, you must have a credit score of at least 640. If you qualify, you can receive up to $40,000 with interest rates between 7.95% and 35.99%.
In addition to credit score requirements, your credit report must be free of bankruptcies, have at least three open trade accounts, and fewer than five inquiries over the past 6 months. You must also have a DTI below 50% to receive a Prosper personal loan.
If you don’t have excellent credit, there are still personal loan options available to you. One lender to consider is LendingClub, which works with borrowers with credit scores as low as 600. Through LendingClub, you can apply for loans of up to $40,000 with interest rates between 6.95% and 35.89%. Through LendingClub, you can prequalify instantly for a loan with terms of 3 years or 5 years.
Discover Personal Loans
Entrepreneurs with a credit score of at least 660 may want to consider Discover Personal Loans. Yes, the credit card network. You can receive $2,500 to $35,000 with interest rates between 6.99% and 24.99%. Best of all, there’s no origination fee or additional fees.
FAQs About Getting A Personal Loan For Business
How Easy Is It To Get A Personal Loan For Business Use?
Even if you have barriers that prevent you from receiving a traditional business loan, a personal loan for business can help. If you have a solid credit score and enough income to make your loan payment, a personal loan can be an affordable way to finance your business. Pull your free credit score, calculate how much money you need (and can afford), and take a look our top personal loans for business compared.
Been in business long enough to get a business loan? Check out our best small business loans compared.