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If you own a farm, ranch, or agricultural business, you may need additional capital to upgrade equipment, manage seasonal cash flow, or purchase land. Those just entering the farming industry may also require significant upfront funding to get their operation established and running smoothly.

Fortunately, there are a number of business loans available to farmers and agricultural entrepreneurs, including federal farm loan programs, farm loan programs offered by commercial lenders, short-term loans, and business lines of credit.

The best business loan option will depend on the size of your business, your credit profile, your collateral, how much capital you need, and how long your farm has been in operation.

Here’s what you need to know about small business agriculture loans.

What Is a Farm Loan?

A farm or agricultural small business loan is intended to help someone maintain, expand, or start a farming business. Farm loans can provide the capital needed at the start-up phase of an agricultural business, as well as help established farmers manage cash flow during off seasons, purchase heavy equipment, fund construction or irrigation, hire workers, or expand their operations.

Farm loans come in the form of short- and long-term installment loans, lines of credit for incremental purchases, equipment financing, and more. Many different entities provide business farm loans, including government programs for agriculture businesses, as well as banks, nonprofits, and online lenders.

How Do Agricultural Loans Work?

Just as there are different types of small business loans, there are many types of farm loans, and each one operates a little differently.

What Can Farm Loans Be Used For?

Government-backed farm loans can typically be used to start, buy, run, or expand a farm. These loans are similar to traditional term loans. You receive a lump sum (the principal) up front and then are given a period of time — anywhere from two to 40 years — to pay it back, with interest, during which you would make predetermined, fixed monthly payments.

Commercial farm business loans operate much like other business loans, though they typically come with higher down payment requirements, shorter payback periods, and higher interest rates. Commercial lenders also offer farmers business lines of credit, equipment loans, and invoice factoring.

Does It Differ From Business Loans for Other Industries?

The United States Department of Agriculture’s Farm Services Agency (FSA) has several farm loan programs designed to fit the needs of new and established farming and agriculture businesses.

Some commercial lenders also market loans specifically to farmers and agricultural businesses. However, these so-called “farm loans” work in a similar way to traditional business loans. Standard small business loans, offered by banks and other business lenders, are also often available to farmers.

Types of Loans for Agricultural Businesses

Below are some small business agriculture loans options you may want to consider.

USDA Farm Loans

The USDA Farm Service Agency (FSA) has several farm loan programs that can provide needed capital to farms, ranches, and agriculture businesses.

Operating Loans

The FSA’s Direct Farm Operating Loan program provides loans up to $400,000 for starting or operating a farm or ranch. The funds can be used for a range of purposes, including purchasing livestock, buying farm equipment, paying operating expenses, improving/repairing buildings, and developing land. Down payments can be as low as 5%, and interest rates are fixed.

Microloans

Farm microloans are small, simplified loans offered by the USDA’s Farm Service Agency to help beginning, small, and niche farmers cover operating expenses, equipment purchases, or minor land improvements. They feature lower borrowing limits ($50,000 or less), streamlined applications, and more flexible requirements than traditional farm loans, making them more accessible for new agricultural businesses.

Guaranteed Farm Loans

The FSA also has Guaranteed Farm Loan programs that make it easier for farmers to receive loans through commercial lenders. Through these programs, the FSA guarantees a large portion of a business loan and, thus, makes farmers more attractive as borrowers.

Long-Term Farm Loans

Long-term business loans, available to farmers through banks and other lenders, are defined as having repayment terms that range from three to 25 years. The loan proceeds can typically be used for any business purpose, including purchasing supplies or inventory, buying livestock, or using the funds as working capital.

Farmers receive the entire loan amount at once and make fixed monthly payments based on the loan amount, term, and interest rate. Because the repayment period is long, lenders are known to have strict qualification requirements, including being in business for at least two years and having a strong credit profile.

Business Lines of Credit for Farms

A business line of credit (LOC) can be a good option if you don’t know exactly how much capital you’re going to need for your farm. A line of credit works in a similar way to a credit card: You get approved for a credit limit and then draw money on demand at any time up to the credit limit.

You are only responsible for paying interest on what you actually borrow. Many farmers and ranchers use LOCs to remedy intermittent cash flow issues or cover unexpected expenses.

Short-Term Loans for Agricultural Business

A short-term loan can be a good option if you need money quickly or have been turned down by traditional lenders. Offered by alternative and online lenders, this type of business farm loan provides a lump sum of cash that gets paid back (with interest) over a short period of time, often three to 24 months. Short-term loans are typically repaid through daily, weekly, or monthly payments.

Qualification requirements aren’t as strict as with traditional long-term loans, and you can often get access to funds within 24 hours. Because they can be funded quickly, short-term loans work well for working capital, filling seasonal revenue gaps, or covering an emergency expense.

However, these loans tend to come with higher costs than other types of financing.

Equipment Loans

Equipment loans are a common loan for agricultural businesses, as farm-related machinery is typically expensive and may exceed a farm’s typical cash flow.

Generally, the way an equipment loan works is that the vehicle or machinery you are purchasing is used to secure the loan, which means you shouldn’t have to put up any additional collateral. Another plus of equipment financing is the loan terms often mirror the actual life expectancy of the equipment itself. So, if the machinery you’re purchasing has an expected useful life of 15 years, you may be able to get a repayment period of the same length.

Recommended: A Guide to Collateral and Business Loans

SBA Loans

Small Business Administration (SBA) loans are a type of small business loan backed by the government, which means that if a borrower defaults, the SBA will cover most of the cost. Though the SBA doesn’t offer any loan products specifically targeted to agricultural or farming businesses, it does serve the industry.

Because the SBA guarantee lessens the risk to the lender, SBA loans typically offer large amounts, low rates, and long repayment terms (up to 25 years). However, these loans are tough to qualify for and require a lengthy application and underwriting process that can take several months.

Invoice Factoring

Invoice factoring is a form of financing in which you sell your unpaid invoices to a third party lender, who immediately gives you a large portion of the invoice amounts up front. The lender is then responsible for collecting on those invoices and, when they do, they give you the balance of the invoice, minus fees (called factoring fees, which are a percentage of the invoice amounts).

Because this type of financing is based on invoices, your credit score isn’t a factor. And, no collateral is required. However, invoice factoring tends to be more costly than other financing options.

Business Credit Cards

A small business credit card can be a handy financial tool to have in your back pocket. It can allow you to buy supplies, cover operating expenses, or handle an emergency without waiting to get approved for a loan.

With some research, you may be able to find business credit cards with low interest rates. Some cards even offer a 0% introductory APR (which may last as long as 18 months). This might allow you to cover an unusually high farming expense, then pay the card off before the standard interest rate kicks in.

Agricultural Real Estate Loans

Agricultural real estate loans help small farming and agricultural businesses purchase, expand, or refinance land and buildings used for farming operations. These loans are often used to buy farmland, construct barns or storage facilities, or improve existing property, and they typically offer longer repayment terms and competitive interest rates to match the long-term nature of agricultural investments.

Livestock Financing

Livestock financing helps small agricultural businesses cover the costs of purchasing, raising, and maintaining animals such as cattle, poultry, or sheep. These loans can be used for buying livestock, feed, veterinary care, fencing, and related infrastructure, allowing farmers to manage cash flow while their herds grow and generate income.

Pros and Cons of Loans for Agricultural Business

Taking out a loan for your farm or agricultural business can be a lifesaver — it can help you manage seasonal dips in revenue, purchase new equipment, hire more workers, and make changes that can boost your profits. If you’re just getting into the agricultural business, a farm loan can provide the cash you need to get you through the startup phase.

On the downside, farm loans with attractive terms and rates can be difficult to qualify for and the application process can be extensive. In addition, you will most likely need to make a down payment on any farm loan. You may also have to put up an asset as collateral or sign a personal guarantee (which would put your personal assets at risk).

Finding Farm Loans

Farm loans can be found from many lenders. The USDA’s FSA program can be a good place to start your search, since these loans offer some of the lowest interest rates and down payment requirements. You may also want to look into SBA loans, which also offer low rates and attractive terms.

Many private lenders also offer loan products that can be useful for farmers, including short-term loans, business lines of credit, and equipment financing. These loans may be easier to qualify for and faster to fund, but generally come with shorter payback terms and higher rates than FSA or SBA loans.

Local Agricultural Lenders and Credit Unions

Local agricultural lenders and credit unions are often a strong starting point when searching for farm loans, as they tend to understand regional farming conditions, seasonal cash flow, and commodity cycles. These institutions may offer personalized service, flexible terms, and loan products tailored to equipment purchases, operating expenses, or land acquisition. Building a relationship with a local lender can also make it easier to negotiate terms and access guidance as your farm business grows.

Online Lenders Specializing in Agribusiness

Online lenders that focus on agribusiness provide an alternative for farmers seeking speed, convenience, or more flexible qualification requirements. Many offer streamlined applications, faster funding, and a range of loan options for equipment, livestock, or working capital. While interest rates and fees may vary, these lenders can be especially useful for small or newer farm operations that need quick access to financing or don’t meet traditional bank requirements.

Applying for Farm Loans

The process of applying for a business loan for your farm will depend on the lender and type of loan you’re trying to get.

For all business loans, however, you will need to provide basic information about yourself and your agricultural business, such as your name, business name, address, phone number, social security number, and federal tax ID.

You will also likely need to prove that your farm is creditworthy and has the means to pay back the loan. Additional documentation to receive a farm loan may include:

•  Business and personal bank statements

•  Income statements

•  Business and personal tax returns

•  Balance sheets

•  Profit and loss statements

•  Business and personal credit scores

Approval times vary based on the loan you’re trying to get. Government farm loans may take several weeks or months, while some alternative loans are instantly approved. To make the loan process as efficient as possible, follow the application instructions to the letter, and make yourself available in case any questions come up.

Recommended: Guide to Typical Small Business Loan Requirements

Alternative Financing Options

If you don’t qualify for financing, or prefer not to take out a loan, there are some other funding options for your farming business. These include:

Farm Grants

Small business grants for farms are available from a variety of federal, state, and local agencies, as well as private organizations.

Value-Added

The USDA offers Value-Added Producer Grants, which can be used by farmers to expand marketing opportunities, create new products, and boost income.

Research and Education

Many farm grants are also available at the state level. To learn more about local grant opportunities, visit your state’s Department of Agriculture website.

Help for Agricultural Entrepreneurs

PA Farm Link, for example, connects new Pennsylvania farmers with retiring farmers. As part of the program, the retiring farmers provide financial assistance to the new farmers until they are able to get their farms up and running. This can be a helpful alternative for anyone struggling to get startup capital for their farm.

Recommended: Small Business Startup Loans

The Takeaway

Farm business loans can play a vital role in helping agricultural operations grow, adapt, and stay financially stable through changing seasons and market conditions. By understanding the different loan options available — from microloans and equipment financing to real estate and livestock loans — farmers and ranchers can choose funding that aligns with their goals and cash flow.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What are agribusiness loans?

Agribusiness loans are financing options designed to support agricultural operations, including farms, ranches, and related businesses. They can be used to purchase land, equipment, livestock, or supplies, cover operating expenses, or manage cash flow, helping agricultural businesses grow, modernize, or remain financially stable.

Can you start a farm with no money?

Yes, starting a farm with no money is possible, but difficult. You can get going through grants, microloans, partnerships, leasing land, or beginning on a very small scale. Many new farmers rely on USDA programs, community support, off-farm income, or gradual expansion to reduce upfront costs and financial risk.

Can you get an agricultural business loan with bad credit?

Yes, farmers with bad credit can often still get an agricultural business loan, especially if your other financials are strong and you have enough cash to make a downpayment.

What are typical interest rates on farm loans?

Interest rates on farm loans vary by lender, loan type, and borrower credit, but they typically range from about 4% to 8%. Government-backed loans, such as USDA or FSA loans, often offer lower rates, while private or short-term loans may have higher rates depending on risk and market conditions.

Are there startup loans for farms?

Yes, startup loans for farms are available. Options include USDA Farm Service Agency (FSA) loans, microloans, and beginning farmer programs, as well as loans from local agricultural lenders and credit unions. These loans are designed to help new farmers cover startup costs like land, equipment, and operating expenses.

Photo credit: iStock/artiemedvedev

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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SOSMB-Q425-040

Whether you plan to take out a loan or you’re looking for investors, one cash management concept to familiarize yourself with is cost of capital. By understanding why cost of capital matters to your business, you may be able to make your business more appealing to investors or increase your chances of getting approved for a small business loan.

Keep reading to learn more about what cost of capital is and why it matters.

What Is Cost of Capital?

The cost of capital for a small business is the rate of return it must earn to justify using funds from lenders or investors. It reflects the combined cost of debt (like loan interest) and equity (the return expected by owners or investors). It’s an important metric to know if you’re evaluating whether a new product is worthwhile or if an investor is assessing whether to invest money in your company.

Cost of capital includes how much it costs your business to access cash, whether that’s through financing or equity. In fact, a simple formula for cost of capital is:

Overall cost of capital = Cost of debt + Cost of equity

Cost of Debt vs. Cost of Equity

Both cost of debt and cost of equity contribute to your cost of capital, but it’s important to understand the difference between them. Cost of debt is the interest rate your firm pays on borrowed funds, less any tax deductions it can take on the interest. If you plan to take out a small business loan, your cost of capital (also called hurdle rate) includes the interest you will pay on that loan over time. Trade credit you have with vendors that you pay in the short term can also qualify as your cost of capital.

Assuming that interest is the rate your company pays on its current debts and tax represents the marginal tax rate, the formula for cost of debt is:

Cost of debt = (Interest expense / Total debt) x (1 – Tax)

As for cost of equity, if your company has investors, your cost of capital includes the cost of the equity they hold. For example, if you receive venture capital in exchange for 25% equity, that 25% contributes to your cost of capital.

If your company is public and sells stock to raise capital, your cost of capital includes the cost of that debt as well as the cost of equity.

How to Calculate Cost of Capital

To calculate the cost of capital, combine the costs of borrowing money (debt) and raising money from investors (equity).

First, figure out the interest rate on loans after taxes. Then, estimate the return investors expect for funding your business. Weigh these costs based on how much of your total funding comes from each source (debt and equity). This gives you the weighted average cost of capital (WACC), which tells you the minimum return your business needs to make projects worthwhile.

Weighted Average Cost of Capital (WACC)

Cost of capital is a general term that refers to the minimum return a company needs to justify an investment. The weighted average cost of capital (WACC), on the other hand, is the most commonly used method to measure the overall cost of capital, combining the costs of debt and equity financing weighted by their proportions in a company’s capital structure.

Example of a Cost of Capital Calculation

To see how this works in action, let’s take an example.

The formula for the overall cost of capital is:

Overall Cost of Capital = Cost of Debt + Cost of Capital

Let’s consider Company ABC. Imagine that it has a capital structure with 60% equity and 40% debt. To arrive at the company’s WACC, we’ll need to weigh the components accordingly.

If the after-tax cost of debt is 4% and equity investors expect an 8% return, the WACC calculation will look like this:

(.40 x 4%) + (.60 x 8%) = 1.6% + 4.8% = 6.4%

Company ABC calculates its weighted average cost of capital (WACC) at 6.4%.

Why Is It Important to Know the Cost of Capital?

Knowing the cost of capital is essential for making informed financial decisions. It acts as a benchmark for evaluating investment opportunities, helping investors gauge whether projects are likely to yield returns exceeding this threshold to create value. It also guides businesses in choosing between financing options, such as debt and equity, by comparing associated costs.

Understanding the cost of capital helps a company optimize its capital structure, reduce financing risks, and enhance profitability.

Impact on Business Valuation and Investment Decisions

Simply put, investors look at cost of capital to estimate what kind of return they might be likely to get for a potential investment. A high WACC often presents a riskier proposition and a less appealing prospect.

The metric is also used in business valuation. Discounted cash flow (DCF) analysis is a common method of valuation, and it bases its estimate of a company’s present day value on the sum of projected future cash flows. WACC is used as the discount rate – to discount these back to the present, allowing for risk and the time value of money. A higher WACC could result in a lower valuation.

Role in Strategic Financial Planning

Cost of capital is important for a company to understand in the context of its investors. But the concept can also be useful when the business is thinking about a new venture, as it can use the hurdle rate to determine how much the project will need to generate in order to pay for the funds needed to start it.

Understanding cost of capital can also help a business optimize its capital structure by finding a mix of debt and equity that will keep its WACC low.

7 Things to Know About Small Business Cost of Capital

Cost of capital matters when it comes to running your business or expanding it. If you want to take on a new project, for example, calculating the cost of capital will help to determine whether the project is worth it.

But that’s not all. Here are seven things to know about small business cost of capital.

Recommended: What are Term Loans?

1. It Matters to Investors

When investors are selecting a business to put their money in, they typically want a good return. The business’s cost of capital tells them the level of risk they would be taking on to attain that return. A high cost of capital signals more risk; a lower one indicates less risk.

An investor typically wants to see a rate of return that is, at a bare minimum, equal to his or her investment. But ideally, the rate of return exceeds that initial investment. Having details on your cost of capital can go a long way toward helping a potential investor decide whether or not to invest.

2. There Are Actually Two Costs to Consider

When you look at costs, there are two you’ll want to consider, depending on how your business gets capital. Cost of equity and cost of debt both factor into your cost of capital.

Let’s look at the cost of equity first. When you work with investors, you’ll have a valuation of what your company is currently worth, and you’ll work to agree with your investors on what percentage of the company they’ll own. Down the road, if your company is doing well and gets valued higher, those investors can cash out their equity and get a rate of return higher than their initial investments. The difference between what they invested originally and what they take out is your cost of equity.

Next is the cost of debt. When you take out a loan or line of credit, you pay interest and/or fees on that financing. The sum of the interest and fees is your cost of debt. Ideally, the cost of debt should prove worthwhile in the long run because the money you borrow can help you grow your business and thus make more money.

3. Weighted Average Cost of Capital May Be Relevant

In the event that your company has both debt and equity, you may need to consider what’s called your weighted average cost of capital (WACC). This calculates an average of both your cost of debt and your cost of equity together, weighted proportionally.

The distribution of debt and equity makes up your company’s capital structure, and every type of debt and equity your business has must be considered to calculate your WACC, including both common and preferred stock, loans, bonds, and other financing. The formula can look intimidating, but basically it is a way to evaluate your cost of capital, taking into account exactly how much of it is equity-based and how much of it is debt-based.

Ultimately, the higher your weighted average cost of capital, the lower your business valuation and the greater the risk to potential investors.

4. WACC Relates to Your Discount Rate

When you look at your weighted average cost of capital in relation to a particular project, you’ll probably want to consider your discount rate. This refers to the current value of future cash flows (net present value). Simply put, it’s a tool to help figure out whether anticipated future returns justify the amount of money you’d need to put into a project.

Let’s say you’re thinking about spending $1 million to expand operations in Europe. How much might that investment net you five years from now? Ideally, it should be more than your initial $1 million investment.

Similarly, an investor thinking about investing in your business will likely consider the discount rate. It provides the potential investor with insight into the risk level, as well as the opportunity cost of your business. It also accounts for the time value of money (TVM).

Here’s a simplified example. You have $100 and want to invest it in a savings account that offers 5% interest per year. At the end of the year, you would have $105. Because your ending balance is more than what you started with, you might consider that a worthwhile investment. Of course, when you’re investing in a business, your returns won’t necessarily be so clearcut.

Weighted average cost of capital is a type of discount rate, and it’s the one investors will likely be keen to examine when they consider investing in your business. An investor may have a specific discount rate in mind that must be reached to move forward with an investment.

5. Cost of Capital Can Help You Evaluate Financing Options

Having an understanding of your business cash flow and the cost of the investment opportunities your company offers is essential, both for you and for any investors.

From your perspective, understanding the cost of capital, particularly the cost of debt, can help you decide whether taking out financing is worthwhile. If what you pay in interest or fees outweighs what you could see in increased revenues, it’s not worth it. On the other hand, if paying, for example, 5.00% interest on a loan could help you realize a 15% growth in revenue, the cost of debt may be justified.

This information is also valuable to investors. The equity you receive from an investor should be used to deliver the expected rate of return. (That will also be beneficial to you, since you are also an equity owner in your company.) If you aren’t able to deliver the expected rate of return, any shareholders you have will likely sell their shares of your company’s stock, which will devalue your company.

That’s why it’s important to have a plan for how you’ll spend the investment capital you receive.

6. You May Be Able to Control Your Cost of Debt

There are many small business financing tools to choose from, and each comes with a different cost of debt. If you take out a loan, you may pay 6.00% annually. If you use a business credit card, your interest might be 16.99% on what you borrow.

Carefully consider your financing options and your ability to repay the loan. The faster you repay it, the less you’ll pay in interest or fees.

The bottom line is that financing can be helpful, but be mindful of how much you pay for it over time. Keeping down the unnecessary cost of debt can help you keep your cost of capital lower.

7. It’s Not an Exact Science

As you’ve seen, determining weighted average cost of capital can look complex and technical. But in fact, there’s no guarantee that an investor will receive a given discount rate for his or her equity. Many factors contribute to the return your business may see, including market conditions, how many competitors are in your industry, how your business is run, and more.

Calculating cost of capital is a way to provide an educated guess on what sort of return an investment might bring, but it’s definitely not set in stone.

The Takeaway

With a solid understanding of what cost of capital means, you can make smarter financial decisions. You can determine what type of loan or financing to take out and how to attract potential investors to help you grow your business.

The more appealing your company looks, the more likely investors will be to give you capital in exchange for equity. Staying on top of your cost of capital can help you show your business in a positive light.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What is an example of cost of capital?

An example of cost of capital is a company with 60% equity and 40% debt. If equity investors expect an 8% return and the after-tax cost of debt is 4%, the company calculates its weighted average cost of capital (WACC) at 6.4%, and that metric can be used to guide investment decisions and evaluate profitability.

What does cost of equity mean?

Cost of equity is the return investors expect for owning a company’s stock. It represents the compensation shareholders require for the risk of investing in the business and is used in valuation and capital budgeting to assess whether an investment or project is worthwhile.

How can I calculate the cost of capital?

To calculate the cost of capital, combine the costs of debt and equity financing using the weighted average cost of capital (WACC) formula. Adjust the cost of debt for tax benefits, and calculate the cost of equity using a model like the Capital Asset Pricing Model (CAPM). Weigh both costs by their proportions in the capital structure.

Why is cost of capital important for small businesses?

Looking at what its cost of capital is can be valuable for a small business for several reasons. Cost of capital can serve as a benchmark for the company as it evaluates its capital structure and contemplates taking on future debt or offering more equity. It’s also important to the business because potential investors can be more likely to consider this metric before deciding whether or not to invest in the company.

What factors influence a company’s cost of capital?

A company’s cost of capital is influenced by interest rates, market conditions, business risk, capital structure (debt vs. equity), creditworthiness, industry stability, tax rates, and investor expectations. Factors like company size, growth prospects, and economic conditions can also affect how much return lenders and investors require.

Photo credit: iStock/pixdeluxe

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOSMB-Q425-045

Starting a new business requires a good idea, customers who want your product or service, and money to get you off the ground. A personal loan to start a business can be one option for funding your business, especially if you don’t yet qualify for a small business loan.

Let’s walk through the difference between personal loans and business loans, the advantages and disadvantages of using a personal loan for business, and some alternative options to explore.

What Is a Personal Business Loan?

Personal loans for business are offered by some banks, credit unions, and online lenders. While many loans will specify what you can spend the money on — a mortgage must be used to buy a house, for example — the sum you receive from a personal loan can be used in several ways. That said, it’s important to confirm with your lender whether its personal loans can be used for business expenses, as some lenders do not allow this.

Your personal loan interest rate is based on various financial factors, including your financial history, income, and credit score. Generally, the higher a person’s credit score, the more likely they are to receive a personal loan with favorable terms and interest rates. Applicants with lower credit scores may have more difficulty qualifying for low interest rates. Lenders tend to see them as at greater risk of defaulting on their payments. To offset that risk, they might charge a higher interest rate.

Personal Business Loans vs Small Business Loans

Borrowing money to pay for business expenses is a decision that takes some consideration. There are different reasons you might want or need a business loan, many lenders to choose from, and different lending options to compare. Some things to think about if choosing between a personal loan for business or a small business loan include:

Recommended: Business Loan vs. Personal Loan: Which Is Right for You?

Benefits of a Personal Loan for Business

Taking out personal loans for business purposes can offer several advantages over other financing options.

Ease of Qualification

If your business is brand new, it can be tricky to get a startup business loan and may be easier to qualify for a personal loan. Banks offer personal business loans based on your personal income and credit score.

By contrast, you’ll be asked for a lot of information during the business loan application process, including your personal and business credit score, annual business revenue and monthly profits, and your length of time in business. The longer your business has existed, the more likely you are to have a record of revenue and profit — and the more likely you are to qualify.

Faster Funding

The length of time it takes to get approved for a personal loan and receive funding will vary by lender. Online lenders are typically faster than traditional banks and credit unions. You are likely to receive funding within seven business days.

By contrast, the process for a business loan can be much slower. For example, it can take 30 to 90 days to receive funding from a Small Business Administration (SBA) loan.

Potential for Low Interest Rates

If you have strong credit, personal loans can have lower annual percentage rates (APRs) than other financing products — such as credit cards. While it can be useful to have a business credit card, you’ll pay a relatively high rate if you carry a balance from month to month.

Small business credit cards may also have penalties and fees that personal loans may not have. These often include penalty APRs that go into effect if you make a late payment, over-limit fees if you spend more than your credit limit, annual fees, and more.

Flexibility and Versatility

Personal loans have few restrictions on how you’re allowed to use the money you borrow. You can use them for anything from debt consolidation to home repairs to a veterinary bill.

Disadvantages of a Personal Loan for Business

Despite the potential advantages of using a personal loan to help you start your business, there are drawbacks.

Some Lenders Don’t Allow Personal Loans for Business

Some lenders place restrictions on how personal loans can be used. It’s wise to be transparent about your intention to use the personal loan for business expenses and confirm if the lender permits it.

In some cases, it may not be. However, it’s far better to be honest about how you plan to use a loan than risk breaching the loan agreement. If you end up using a loan in a prohibited way, your lender could force you to immediately repay the full amount of the loan with interest.

Lower Loan Amount Limits

Personal loans generally offer borrowing limits as low as $1,000. They can go as high as $100,000 for larger personal loans. For small businesses, this might be plenty. But if you own a larger business that needs more money, you might benefit more from a loan specifically designed to meet business financial needs. Small business loans generally have lower interest than personal loans.

Shorter Repayment Terms

Lending periods for personal loans vary. Typically, you can find loans with term lengths of 12 months to five years. Compared to some small business loans, this is a relatively short period. Consider that for SBA loans, maximum terms can be as much as 25 years for real estate, 10 years for equipment, and 10 years for working capital or inventory.

Potential to Affect Personal Credit Score and Assets

If you take out a personal loan and can’t make monthly payments, you are putting your personal credit at risk. Missed payments may harm your credit score, which can make it more difficult for you to access funding in the future.

Recommended: What Is Considered a Bad Credit Score?

Fewer Tax Deduction Opportunities

Generally, the interest you pay on a personal loan is not tax deductible, unlike the interest paid on business loans. However, there’s an exception if you use the proceeds of a personal loan for business purposes.

However, this can get a bit tricky, as you may only deduct interest on the portion of the loan used for business expenses. So if you use any of that money to remodel the primary bathroom in your home, for example, interest on that portion can’t be deducted.

How to Get a Personal Loan for Business

Securing a personal loan for business purposes involves several key steps. The process looks like this:

1.    Assess your finances: Begin by looking at your personal credit score, income, and overall financial health. This will give you insight into the likelihood of qualifying for a personal loan and the interest rates you might get.

2.    Choose a lender: Look for banks, credit unions, and online lenders that offer personal loans suitable for business purposes. Make sure they allow you to use personal loan funds for business expenses. Compare interest rates, loan terms, and fees to find the best lender for your needs.

3.    Prepare your documents: Gather documents like proof of income, tax returns, identification, and any business-related information required for your application.

4.    Submit your application: Complete the loan application process with your chosen lender. Be honest about your intention to use the loan for business expenses. This transparency helps avoid potential issues in the future.

5.    Review loan terms: Once your application is approved, carefully review the loan terms, including the interest rate, repayment schedule, and any associated fees. If everything looks good to you, accept the loan terms to move forward with the funding process.

What to Consider Before Applying for a Personal Loan for Business

When analyzing the benefits and risks of this approach, consider these factors.

•   Your personal creditworthiness: Using a personal loan for business mixes your individual finances with the company’s risk. Think about the effects this move might have on your personal credit score and future loans.

•   Your business revenues: You’ll want to be sure your business will bring in enough money to cover your monthly personal loan payments. Run the numbers to be sure that paying the costs for this loan won’t force you to skimp on other needed business expenditures.

•   The loan’s true cost: Beyond the loan’s interest rate, lenders may charge fees for loan origination, late payments, loan processing, or account maintenance.

•   Timing: Funding for a personal loan may be processed faster than for a business loan. That’s an advantage over SBA loans, which can take up to three months to come through, possibly costing you a current opportunity.

•   Usage restrictions: Some personal loan agreements forbid using funds for business, so double check that your prospective lender permits it.

•   Repayment details: If you do get the green light, you may want to have on hand a solid business plan (showing revenue model and expenses, for example) to show how the loan will be repaid.

There are funding alternatives that could cost you less or give you added flexibility. Those are detailed in the next section.

Alternatives to Personal Business Loans

Personal loans might not be ideal for everyone and aren’t the only funding option for your small business. It may be worth considering small business loans or other types of business loans as alternatives.

Small Business Loans

Small business loans are offered through online lenders, banks, and credit unions. There are various options available, each designed for specific purposes. For example, a working capital loan is designed to help you finance the day-to-day operations of your business. Equipment financing can help you replace aging technology and buy new tools and machinery.

SBA loans are guaranteed by the Small Business Administration, whose aim is to help small businesses start and grow. If you aren’t able to make your payments, the SBA will step in and cover up to 85% of the default loss. By reducing risk in this way, the organization helps businesses get easier access to capital.

Shopping around for the best small business loan rates is a good way to compare lenders and find the one that works best for your unique financial needs.

Business Lines of Credit

A business line of credit is revolving credit, similar to a credit card. You have a set credit limit and only pay interest on the amount you’re currently borrowing, making it a more economical option than a term loan for some business owners. As you repay the funds, they are available to borrow again.

Another advantage to a line of credit over a term loan is the ability to use a check to pay vendors who do not accept credit cards.

Business Credit Cards

Business credit cards can be useful for separating personal and business expenses. They also usually have higher credit limits than personal credit cards, which gives you more flexibility to make larger business purchases. Plus, they may offer rewards, perks, and bonuses. It’s important to keep in mind, however, that credit cards tend to have higher interest rates than other types of business financing.

Recommended: Can You Get a Business Credit Card Before You Open Your Business?

Merchant Cash Advance

A merchant cash advance (MCA) is an alternative form of financing for businesses that get revenue through credit card sales. With an MCA, a business can borrow a lump sum of money and repay the lender with a percentage of future credit card transactions. The repayment amount is larger than the advance, since the lender charges a fee. In some cases, MCA fees can significantly exceed interest rates on other types of business loans.

The Takeaway

Can you use a personal loan to start a business? Perhaps. Taking out a personal loan may be one way to fund your small business needs. However, some lenders do not allow a personal loan to be used for business purposes. It’s a good idea to explore alternatives, such as a small business loan or line of credit.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

Can a personal loan be used for business?

Yes, you can use personal loans for business if the lender allows it. It’s important to check with the lender to ensure there are no restrictions on using the loan for business expenses.

Can I write off a personal loan if used for my business?

You can typically write off the interest on a personal loan used for business purposes, but only the portion directly related to business expenses. Personal loan principal repayments are not tax-deductible.

Does the SBA offer personal loans?

No, the Small Business Administration (SBA) does not offer personal loans. The SBA provides various loan programs designed specifically to support small businesses, such as SBA 7(a) loans and SBA 504 loans.

What are the risks of using a personal loan for business purposes?

Funding your business with a personal loan can present a number of risks. The overall risk is that such a loan puts your individual creditworthiness on the line, as personal loans always require a personal guarantee. This means:

•   Any missed payments could hurt your individual credit history.

•   Even if you pay on time, you’d miss the opportunity to build your business credit score.

•   Defaulting on a personal loan could cause lenders to take legal action, meaning you’d probably have to pay for a lawyer to represent you.

•   Negative consequences from a lawsuit could include a lien on your home or garnishment of your wages.

Can startups qualify for a personal loan for business?

Generally, the answer is no. Many lenders disallow the business use of a personal loan, for one thing. For another, lenders ordinarily approve or deny loans based on the borrower’s ability to manage repayments — and given the high rate of startup failure (roughly 20% in the first year), both personal and business loans to new entrepreneurs are often seen as too risky.

Photo credit: iStock/fizkes

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOSMB-Q425-023

If your business relies on one or more cars, vans, or trucks, you may want to look into getting a business auto loan — or refinancing an auto loan you already have.

Business auto loans typically use the vehicle itself as collateral, so they often come with attractive rates and terms. They can also be easier to qualify for than other types of business loans. It’s quite common to get a business auto loan without a personal guarantee if your company’s credit history is solid.

Here’s a closer look at business vehicle financing, including how these loans work, which lenders offer them, and how to get an auto loan for your small business.

What Is a Business Auto Loan?

A business auto loan is a type of financing that you can use to purchase a vehicle for your company. This type of loan can typically be used to buy cars, vans, and some trucks. For a heavier-duty vehicle or commercial truck, you may need to look into getting an equipment loan or commercial truck loan instead.

As with secured auto loans for consumers, business auto loans are ordinarily secured with the vehicle acting as collateral for the loan. If you default on your payments, the lender can seize and re-sell the vehicle to recoup its losses.

How Do Business Auto Loans Work?

Business auto loans work in a similar way as other types of small business loans: You get financing to buy the vehicle upfront, then pay it back (plus interest and any fees) in monthly installments over a set term.

Unlike a personal auto loan, however, the vehicle you are buying must be for business purposes. In fact, the lender may ask you how you plan to use the vehicle and require supporting documentation (such as a business plan or company financial statements).

Another aspect that demonstrates how business loans work vs. personal auto loans: For qualified borrowers, some lenders will let you put a business auto loan in your company’s name only. This can protect your personal credit or assets should your business be unable to repay the debt.

If you don’t have established business credit, though, you may need to provide a personal guarantee for the loan, which means you will be personally responsible for repaying the loan should your business become unable to make payments.

Recommended: Personal Loans vs Car Loans: What’s the Difference?

Business Auto Loan Amounts

The amount of money you can get with a business auto loan will depend on the lender, the type of vehicle you’re purchasing, and your qualifications as a borrower. In general, though, small business loan amounts range anywhere from $5,000 to $2 million-plus.

Term Length

The typical business auto loan term ranges from three to seven years, depending on the lender and the vehicle type. Shorter terms often have higher monthly payments but lower total interest costs, while longer terms spread payments out over time but increase overall expenses.

Repayment Structure

With a business car loan, you receive the entire principal upfront then start repaying it (plus interest) in monthly installments for a set term.

In some cases, a business car loan might be structured like a balloon payment loan. This involves paying a set amount monthly and then making a balloon payment — a one-time, larger-than-usual payment — at the end of a loan.

Before you enter a business auto loan agreement, it’s a good idea to fully understand the loan’s repayment terms.

Commercial Truck Loans

If you’re looking to purchase one or more semitrucks for your business, you may need to look for a commercial truck loan rather than a commercial auto loan. You can get semitruck financing from many lenders, including traditional banks, online business lenders, and alternative lenders that focus entirely on big rig lending. In some cases, commercial truck loans are part of a lender’s equipment loan (or equipment financing) program.

Recommended: How Much Funding Can I Get From a Business Loan?

Types of Vehicles You Can Finance

A business can finance just about any work-related car or truck. For lenders, the type of vehicle is likely to be less important than its intended use. You may be asked to show documentation — such as a commercial insurance policy — to prove the car or truck’s business purpose.

Light-Duty Vehicles

Sedans, SUVs, and other standard cars can be business vehicles if they’re used mainly for work. That could involve visiting distant customers, meeting with clients around town, or just commuting to the office.

Cargo vans are a must for deliveries or mobile services. Certain vendors, such as bakeries, florists, or catering services, may want refrigerated vans.

Heavy-Duty and Specialty Vehicles

Moving or storage businesses often require box trucks or oversize trailers, while landscapers and general contractors are likely to need pickup trucks. Semitrucks are used for hauling shipping containers and other heavy cargo.

For these bigger vehicles — as well as construction machinery such as excavators and bulldozers — a commercial truck loan or equipment financing may be a better fit than a business auto loan. Also, as noted above, there are lenders that specialize in big rig lending.

Fleet Financing Options

Strategies for financing a business fleet generally boil down to purchasing or leasing. Here’s a summary (we’ll go on to compare buying vs. leasing in more detail):

•   Purchasing: This is a capital expenditure that usually requires loans. Looking beyond commercial auto loans, you could explore traditional term loans, government-backed SBA loans, a business line of credit, or asset-based lending such as debt factoring. Because the vehicles act as collateral, lowering lender risk, you can generally qualify for business auto loans without a personal guarantee.

•   Leasing: Requiring less capital upfront, leasing can help get your business going without much friction. It can also help you equalize your monthly expenses. You can choose between operating leases, which don’t build equity, or capital leases, which offer purchasing at the end of the term.

Buying vs Leasing

When shopping for a business vehicle, you may have a choice of purchasing the vehicle outright (with financing) and owning it, or leasing the vehicle instead. There are pros and cons to leasing vs. buying a vehicle to consider.

Since lease payments don’t have interest, they usually cost less than auto loan payments per month. However, unlike with an auto loan, you don’t own the car, and you have to turn it in at the end of your lease.

Generally, if you want to keep the vehicle for an extended period of time, you may be better off buying the vehicle with a loan. This way, you can rack up the mileage and don’t have to worry as much about wear and tear on the car. And, in the long run, business auto loans tend to be cheaper than business car leasing.

However, if you want to upgrade your business vehicle every few years to a newer model, or you don’t plan on racking up a large number of miles, an auto lease could be a smart option. Keep in mind, though, that leases are usually more expensive than loans in the long run, especially since you’ll have to pay more if you want to buy the vehicle when the lease expires.

Here’s a look at key differences between buying vs. leasing equipment for your business:

Recommended: 22 Small Business Tax Deductions to Know

6 Steps To Getting a Commercial Auto Loan

Applying for a commercial auto loan is relatively simple, but a little advance planning can streamline the process. Here are the steps on how to get a commercial auto loan.

1. Figure Out Your Budget

A good first step is to consider the maximum amount your business can afford to spend — both upfront and per month — on a business vehicle. Keep in mind that the total cost will include more than the monthly auto loan payment. You’ll also want to factor in a down payment, lender/dealer fees, insurance, annual registrations, maintenance, and fuel.

2. Review Your Credit

Before you start looking at loans, it’s a good idea to check your business and personal credit scores to give you an idea of what type of loan you might qualify for. Credit requirements will vary by lender. Overall, banks tend to have stricter qualification requirements than alternative lenders.

Recommended: How Do I Check My Credit Score?

3. Find the Right Vehicle

Before shopping for a loan, you’ll want to consider what kind of vehicle you want to buy for your business. Business auto loans generally cover vehicles under 2.5 tons. If you’re in the market for a heavier duty vehicle, you’ll likely need to seek out an equipment loan or equipment lease.

Also keep in mind that some lenders will only finance new vehicles, while others will finance used business vehicles that meet certain requirements, such as being less than five years old or having less than 75,000 miles.

Lenders will typically want to see a quote as part of your financing application, so once you’ve found the vehicle that you want, ask the dealer to write up an invoice.

4. Compare Financing Options

Some lenders will allow you to prequalify without triggering any hard credit checks — the kind that can negatively affect your credit. This typically involves filling out a short form. You’ll often get an answer right away.

If you are able to get a few financing options, you’ll want to compare them by looking at their annual percentage rates (APRs). A loan’s APR includes both interest and fees, allowing you to compare financing options apples to apples. You can also compare each loan’s required down payment amount, term length, and monthly payment.

5. Apply With a Lender

Once you’ve decided on a lender you’d like to work with, you’ll need to officially apply for the loan. Generally, banks will have a lengthier, more involved application process, while online lenders tend to offer simpler applications and faster funding.

The process will vary depending on the lender, but, typically, you’ll need to provide your vehicle quote, as well as your company’s key financial statements, bank statements, and tax returns. You may also need to provide personal documents proving your personal income and creditworthiness.

6. Sign!

Once you’re approved for a commercial auto loan, you’ll want to carefully review the loan agreement and make sure you understand all of the terms and conditions. If everything looks good, you simply need to sign and return the documents.

The turnaround time between signing and funding will vary by lender but can take anywhere from one business day to a few months.

What Lenders Look for in a Business Auto Loan Application

As with any loan, lenders want assurances that you’ll be able to repay the business auto loan. Specific requirements will vary, depending on the lender, the loan amount, and the vehicle type. Still, there are some overall similarities.

Generally lenders consider your company’s credit history, financial stability, annual revenue, and longevity. Sole proprietors and startup owners can also expect to have their personal credit history and income examined.

Many lenders prefer businesses that have been open for at least two years, but some might be flexible on this issue, especially if they make a point of lending to startups. It’s worth looking into online business loans for equipment financing, too.

You’ll likely be asked to present basic business documentation such as:

•   Business license

•   Employer identification number (EIN)

•   Financial statements, including balance sheets and cash flow statements

•   Business and personal tax returns for the past few years

•   Bank statements for the past 12 months

•   Vehicle details such as make, model, year, VIN, and mileage

The lender may have rules about the age or condition of the vehicles as well.

Commercial Auto Loans with Bad Credit

It may be possible to qualify for a business auto loan with bad credit. That’s because this type of financing typically comes with built-in collateral — should you become unable to make your payments, the lender can seize the vehicle and sell it to recoup its losses. This makes business auto loans less risky to a lender than some other types of business loans.

That said, borrowers with bad credit may not qualify for the best rates and terms. In other words, you may get a loan for a lower amount, pay a higher APR, and have a shorter timeline for repayment than a business owner with good or excellent credit. You may also be asked to sign a personal guarantee.

Recommended: Business Loans for Bad Credit

Business Auto Loans vs Personal Auto Loans vs Equipment Financing

You can use equipment financing to buy cars, trucks, computers, furniture, and other supplies for your business. Personal auto loans and business auto loans, meanwhile, can only be used to buy motor vehicles.

Personal auto loan options are typically based on your personal credit history, but business auto loan options are typically based on your business credit score, time in business, and business revenue. Another difference is that getting a business auto loan can help you build business credit, whereas getting a personal auto loan will not have any impact on your business credit.

Business auto loans generally cover cars, vans, and small trucks. If you’re in the market for a heavy-duty vehicle for your business or you’re struggling to get commercial vehicle financing, you may want to consider applying for equipment financing from an online lender.

Also keep in mind that purchasing a vehicle through your company will reduce your personal liability for the vehicle. However, it may come with higher insurance costs.

Equipment financing can be used to buy or lease qualifying business equipment. Lenders may provide up to 100% of the value of the equipment, or they might require a 10% to 20% down payment for items with a high rate of depreciation, including commercial vehicles.

Alternative Financing Options

A business auto loan isn’t the only way to finance a vehicle purchase for your business. Here are other alternatives you may want to consider.

Term Loan

You can apply for a term loan as a source of funding for your business. A term loan gives you a lump sum of money upfront, and you typically have to repay the loan over a fixed period with interest.

SBA Loan

You can apply for an SBA loan as another source of funding for your business. SBA 7(a) loans can be used for almost any purpose, including buying commercial vehicles for your business.

Business Line of Credit

You can apply for a business line of credit if you need financing for your business. An unsecured business line of credit does not require any collateral, whereas commercial equity lines of credit do. With a business line of credit, you can use funding up to your approved credit limit, pay it off, and use it again.

Tax Benefits of Business Auto Loans

When buying or leasing business vehicles, the acquisition’s tax consequences are also worth considering. Lease payments on a vehicle used strictly for business purposes are generally deductible in full. By comparison, tax deductions on purchases can be somewhat complex.

Section 179 Deduction

The IRS Tax Code’s section 179 permits businesses to write off qualifying vehicles as tax deductions. If you use your purchased vehicle entirely for business, it probably qualifies for this deduction. For SUVs, the maximum section 179 expense deduction in 2025 and afterwards is $31,300.

Overall, the current maximum expense deduction under section 179 is $2.5 million. It begins phasing out dollar-for-dollar when the business spends a total of more than $4 million on eligible purchases.

Depreciation and Interest Deductions

Over time, business vehicles decrease in value due to wear and tear. This loss of value, known as depreciation, is considered a business expense and therefore is generally tax-deductible over several years.

Your business also has the option of bonus depreciation, which writes off 100% of the cost of qualified property that was acquired and put into service after January 19, 2025. Your accountant or other tax professional can tell you more about bonus depreciation and section 179 deductions for your business.

Bear in mind that cars and trucks depreciate at different rates. The depreciation rate can be affected by the vehicle’s mileage, make, model, safety profile, fuel economy, and other factors.

Interest on a business auto loan is typically tax-deductible. In addition, if the vehicles are used only for business purposes, IRS rules say you may be able to deduct gas, repairs, insurance, and related expenses. The deduction can be calculated using either the standard mileage rate or the actual-expense method.

Is Refinancing Commercial Auto Loans Possible?

You may be able to refinance a business auto loan and potentially get a lower APR and/or reduce your monthly payment. Generally, a good time to refinance an auto loan is when your business or personal credit has improved, you’ve paid a substantial portion of your loan off, or interest rates have gone down.

Keep in mind, however, that extending the term of your auto loan can result in higher overall costs, and some banks have restrictions on mileage and vehicle age.

The Takeaway

Business auto loans typically come with built-in collateral — the vehicle itself. As a result, they may cost less or be easier to qualify for than other loans, and depending on the lender, you may not have to provide a personal guarantee to secure the debt.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

Do business auto loans show up on personal credit reports?

No, a business auto loan typically won’t appear on your personal consumer credit report. If you take out a business auto loan in your company’s name, it won’t appear on your personal credit report or impact your personal credit score. If you haven’t yet established a business credit history, however, you may need to provide a personal guarantee, which can affect your personal credit history if your business defaults on the debt.

What does your business credit score need to be to get a business auto loan?

You’ll generally need a FICO® Score over 575 to get a business auto loan. Eligibility criteria can vary by lender, but securing a business car loan with bad credit can be difficult.

Do all banks offer commercial vehicle financing?

No, all banks don’t offer commercial vehicle financing. However, there are plenty of commercial banks across the United States that offer business auto loans if you need commercial vehicle financing.

Can a business take over a car loan?

Yes, in some cases it may be possible to transfer your car loan to a business. This could only be done if the lender gives you permission to transfer your car loan and title to a business that would assume the responsibility of paying the loan. You can contact your lender to discuss whether it allows businesses to take over car loans.

Can you use your EIN number to buy a car?

Yes, you can use your employer identification number (EIN) when buying a business car. If you own a business and want to apply for a business auto loan, you may do so using your EIN.

Photo credit: iStock/deepblue4you

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOSMB-Q425-017

When you start your own business, you may have trouble getting approved for traditional financing because you haven’t been in business very long or haven’t established business credit. Yet you may still need capital to launch your business, renovate space, or hire employees.

An unsecured business line of credit for startups may be one option worth considering. Be aware that they usually have higher interest rates than some other forms of funding because lenders consider them riskier.

Keep reading to learn what an unsecured business line of credit is, pros and cons, and how your startup may be able to qualify for one.

What Is an Unsecured Line of Credit?

An unsecured business line of credit (a business line of credit unsecured by any kind of collateral) is a flexible form of financing that allows businesses to borrow funds as they need them. Much as you would with a credit card, you spend what you need (up to your set credit limit), pay it back with interest, and are then free to draw on the funds again. Typically, interest is charged only on the amount borrowed. Unsecured lines of credit do not require collateral, such as property or equipment.

The credit limit on an unsecured business credit line is determined by the lender based on the business’s creditworthiness and financial history. Because startups lack an established financial history, lenders typically require strong personal credit scores, a solid business plan, and sometimes a personal guarantee to offset the risk.

Pros and Cons

An unsecured business line of credit may make it easier for startups to access funds for operational needs or growth opportunities. However, like any form of business financing, they come with pros and cons.

Pros of unsecured business lines of credit for startups include:

•   Quick access to cash

•   Interest charged only on the amount borrowed

•   No collateral required

Cons of unsecured business lines of credit for startups include:

•   May require a strong personal credit score

•   Interest rates may be higher due to lack of collateral

•   Credit line may be low

Recommended: Startup Credit Card Funding

How It Works for Startup Financing

Unsecured business lines of credit can be appealing to startups in need of funding they can turn to for longer-term projects or unexpected emergencies because they don’t necessarily require that businesses have an established credit history or substantial collateral to secure them.

Typically, a small business will apply for an unsecured business credit line, and the potential lender will likely want to see the founder’s credit score and some indicators of the business’s financial status, which may include the business plan or signed contracts. Initial credit lines typically range from $10,000 to $1000,000 but may be increased over time as the company grows.

Generally, if you are approved for a business line of credit, you’ll have a draw period of 12 to 24 months during which you can take out funds up to your limit and pay interest only on what you’ve drawn. That’s generally followed by a repayment period, during which you will pay back principal as well as any remaining interest.

Unsecured vs Secured Business Line of Credit

The difference between secured and unsecured lines of credit is that secured business lines of credit require collateral, whereas unsecured lines do not. Collateral, which can include property, equipment, or inventory, backs the loan and reduces the lender’s risk.

This often results in lower interest rates, higher credit limits, and more favorable terms.

In contrast, an unsecured business line of credit doesn’t require collateral, making it more accessible for businesses without significant assets.

Recommended: Unsecured Business Loans

Key Differences in Risk and Qualification

While both secured and unsecured business loans can be useful to startups, there are differences between them, especially when it comes to the risks they present for lenders and the qualifications required of borrowers as a result. This table summarizes some of the most important.

Requirements to Qualify

For established businesses, lenders look at credit scores, time in business, and annual revenue to assess whether they qualify for an unsecured line of credit. However, startups typically do not have established revenue or a lengthy business history.

Because of that, lenders typically require a strong personal credit score, especially since there is no collateral involved. Startups may also need to provide a solid business plan and financial projections to demonstrate the viability of the business.

Some lenders may also require a personal guarantee, meaning the business owner is personally liable for repayment. Additionally, the startup should be legally registered and in good standing, with a clear use planned for the credit line, such as managing operational costs.

Alternatives to Unsecured Business Line of Credit for Startups

Some startups may find it difficult to qualify for an unsecured line of credit. Here are a few other small business financing options that may be available to startups.

Business Credit Cards

A business credit card can provide new business owners with needed access to cash. It can also be an important tool to help business owners separate their personal finances from their business finances. Credit card issuers will generally review factors like your personal credit score and income to assess whether you qualify. Some options may require collateral or a personal guarantee.

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SBA Microloans

The U.S. Small Business Administration (SBA) has a microloan program that offers loans up to $50,000 to certain eligible small businesses. These small business microloans can be used to finance things like working capital, inventory, furniture, and machinery or equipment. Other SBA loans may also provide eligible small businesses with funding to meet their needs.

Crowdfunding

There are a variety of crowdfunding platforms online that help business owners try to raise money to support their business. This process can allow business owners to fund their business without taking on additional debt.

Equipment Financing

Equipment financing helps businesses that are in need of new or used equipment. With this type of loan, the equipment becomes the loan collateral, which means that lending requirements may be less strict than they would be for unsecured loans.

Peer-to-Peer Lending

Peer-to-peer (P2P) lending involves borrowing money from individual investors. Usually, this process takes place through a dedicated online platform which sets the terms of loans according, in part, to its assessment of risk. If you apply for a P2P loan, you will have to supply the platform with your company’s financial information so that it can assign you a risk level.

Revenue-Based Financing

In this form of funding, investors provide upfront funds to a company in exchange for a set percentage of the company’s revenue when it comes in, up to a predetermined limit. This limit could be in the range of three to five times the original investment, but the fact that it’s paid as revenue comes in can make the repayments feel more flexible than they might for more traditional funding methods.

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An Unsecured Business Line of Credit Can Give You the Boost You Need

Having access to cash when it’s needed can be tremendously helpful to a startup. It can be used for business growth, managing cash flow, purchasing inventory, covering operational expenses, financing short-term projects, or addressing unexpected costs.

Keep in mind, though, that some lenders will charge more than others — whether that’s in fees, interest, or both — so it’s important to choose a lender that will offer you the best rates and terms for your situation.

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The Takeaway

An unsecured business line of credit can help you fund and build your venture. The growth of many new businesses depends on their ability to access adequate capital. However, unsecured business lines of credit often have higher interest rates than other forms of funding and you may have to sign a personal guarantee, meaning you will be responsible for paying if the business fails.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What is an unsecured line of credit for business?

An unsecured line of credit for business is a revolving credit account that a company can access and draw funds from up to a set limit. It’s a commercial lending product that does not require businesses to pledge any assets as collateral.

How do I get a $250,000 unsecured line of credit for my business?

Each lender has a different cap for lines of credit, so look around to find one that offers $250,000 or more, then review the requirements to see if you might qualify.

How do I qualify for an unsecured line of credit for small business?

Requirements vary from one lender to another, but you will likely need to meet eligibility standards like a minimum time in business. Your business may also need to generate strong annual revenues and meet a minimum level of creditworthiness to qualify for an unsecured line of credit.

What banks give out unsecured lines of credit?

Many major banks offer unsecured lines of credit, including Wells Fargo, Bank of America, and PNC Bank. Credit unions and online lenders also offer unsecured lines of credit. It’s always best to shop around to determine who can offer you the best rate and terms for your situation.

Is an unsecured business line of credit good for startups with no revenue?

An unsecured business line of credit for a new business with no revenues might be useful, especially if the company has a specific funding need that the line of credit would meet. However, it may be difficult for a startup with no revenues to obtain an unsecured line of credit as revenue is likely a factor lenders will consider when they are deciding whether to extend credit. Crowdfunding or equipment financing might be more accessible options.

Photo credit: iStock/Erdark

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