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.
Key Points
• Personal business loans offer flexibility in spending, but it’s crucial to confirm with lenders whether they will allow you to use the loan for business purposes.
• Your personal loan interest rate is influenced by your financial history, income, and credit score, with higher credit scores leading to better rates.
• Benefits of personal loans for business include ease of qualification, faster funding than business loans, and lower interest rates than credit cards.
• Personal loans can be versatile with few spending restrictions, but they may have lower borrowing limits and shorter repayment terms and can affect your personal credit score.
• Alternatives to personal business loans include small business loans, business lines of credit, business credit cards, and merchant cash advances.
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:
| Factor to Consider | Personal Loan for Business | Small Business Loan |
|---|---|---|
| Use of funds | Some lenders may not allow personal loan funds to be used for business purposes | Specifically for business purposes — cannot be used for personal use |
| Qualification | Personal creditworthiness determines approval, interest rate, and loan terms | Lenders will require business financials, proof of time in business, and other details, in addition to possibly taking personal credit into account |
| Interest rate | Depending on your creditworthiness, interest rate may be lower than other forms of credit, such as credit cards | Depending on the type of loan, interest rates on SBA loans may be lower than some personal loans |
| Loan amount | Up to $100,000 depending on the lender. | SBA maximum loan amount is $5 million.
Some lenders may approve working capital loans for up to several million dollars |
| Funding time | Depending on the lender, loan funds may be disbursed as soon as the day of approval or in up to seven days | The SBA loan timeline is between 60 and 90 days from application to disbursement.
A working capital loan from a traditional lender may be approved quickly and funded shortly after approval |
| Tax deductibility | Interest is not generally tax deductible | Interest may be tax deductible in some cases |
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 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. On the other hand, 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. Credit cards may also have penalties and fees that personal loans may not have, such as 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.
Recommended: 11 Types of Personal Loans & Their Differences
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.
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. An equipment loan can help you replace aging technology and buy new equipment.
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 loans 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.
Photo credit: iStock/fizkes
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