Can you get a personal loan for a business?
A personal loan is money borrowed from a bank, credit union or online lender that can be used for any number of purposes, including to fund a business.
Most personal loans are unsecured, which means they don’t require collateral, and you pay them back in fixed monthly payments — typically over two to seven years. Some lenders may not allow you to use a personal loan for business expenses, so it’s always best to check before you submit an application. This information may be available on the lender’s website or you can call their customer service department to confirm.
Benefits of using a personal loan to start a business
Flexibility: As long as your lender has no rules against using a personal loan for your business, you can use the money however you want, including to purchase equipment and inventory, stock up on office supplies, kickstart your marketing efforts or cover other costs.
Low rates: Depending on the rate you qualify for, personal loans can have lower annual percentage rates than other financing products — like credit cards, if you carry a balance — saving you money. Interest is also fixed, so your rate won’t change over the life of the loan. Easier to qualify: If you’re just starting your business, you may have more luck qualifying for a personal loan than a traditional business loan, since business loans look at your company’s revenue and time in business, along with your personal credit score.
Personal loans are underwritten based primarily on your credit score and income. That means you can include other income sources — like earnings from a 9-to-5 job or rental properties — to supplement the income you’ll earn from your new venture.
Fast funding: Most personal loans are funded within one week, though if you go with an online lender, you may receive the funds the same or next day after you’re approved. This is faster than some traditional business loans, like SBA loans, which can take 30 days to a couple months to get from approval to funding. Drawbacks of using a personal loan to start a business
May not receive a full tax deduction: Interest paid on a personal loan is typically not tax deductible, unlike interest paid on business loans. However, there’s an exception for when you use a personal loan to cover business expenses. To get the full deduction, you’ll need to make sure no portion of the loan is used for another type of expense.
Personal credit or assets could be at risk: If you take out an unsecured personal loan and fail to repay it, your credit will take a hit, which makes it harder to access affordable financing in the future. If you take out a secured personal loan and tie it to an asset like your car or home, the lender can seize that asset if you default. Small loan size: Personal loans tend to have smaller loan amounts — up to $50,000 for most lenders — than business loans. For a small startup, the size might be just right, but if you own a more established company or plan on making big purchases, you may need a larger amount.
Shorter repayment terms: Most personal loan terms range from two to seven years, so if you need a longer repayment term, you’re better off looking at other small-business financing alternatives. SBA loans tend to have the longest repayment terms, ranging from 10 to 25 years.
When it makes sense to get a personal loan for business
You might consider a personal business loan if you haven’t been in business long enough to qualify for a traditional business loan and you’re looking to borrow less than $100,000.
A personal business loan might also be a good choice if you need money soon and can’t wait the time it takes a traditional business loan to process.
Compare APRs with other financing options to make sure a personal business loan is the least expensive choice.
How to get a personal loan for business
1. Pre-qualify with multiple lenders
To get a personal loan for business, you’ll need to apply with a bank, credit union or online lender.
Some lenders, especially online lenders, let you pre-qualify before submitting your application. That means you can see potential loan terms, including what interest rate you may qualify for, without submitting to a hard credit check, which can temporarily lower your credit score. Consider pre-qualifying with a few lenders to find the best rate.
2. Submit your loan application
Once you’ve decided on a lender, it’s time to complete your application. You’ll need to supply information like your personal details and contact information, your Social Security number and any supporting documents that verify employment and income.
Approval decisions can be instantaneous or take a few days, depending on the lender.
3. Get funded
Once approved, you’ll sign the loan documents and receive the funds in your account, sometimes as early as the same or next day. Once funded, make a plan for how you’ll manage your payments over the course of the loan. Missing even one payment can trigger a late fee and a hit on your credit score, which may make it harder in the future to access affordable credit for your business.
Alternatives to personal business loans
Small-business loan: If you're an established business and want to explore other options, a small-business loan may be a smart choice. When reviewing your application, small-business lenders prefer to see at least two years of operation, though some online lenders may only require a minimum of six months.
Business line of credit: A business line of credit is a type of small-business loan but with more flexibility. It works like a credit card, letting you borrow up to a certain limit and then paying interest only on what you borrow, so it’s ideal for business owners who aren’t sure of the scope of their financial need.
Business credit card: A business credit card offers revolving credit that’s ideal for short-term expenses and may be easier to qualify for than a small-business loan. Business credit cards also offer rewards, like cash back or travel points, and can help keep your business and personal finances separate.
