How To Get A Personal Loan For Your Small Business & When To Do It

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.

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?

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…

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.

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.

Prosper

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.

LendingClub

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.