Can I Use A Personal Loan to Start A Business?

Business loans can be great cash injections and can provide the seed capital needed to grow your business. However, they are not always easy to obtain, especially compared to personal loans. So, is it possible to get a personal loan and use it for your business?

Nic Redfern Published on 30 October 2020. Last updated on 20 January 2021.
Can I Use A Personal Loan to Start A Business?

Starting a business isn’t easy. From the idea itself to its eventual conception, turning a dream business idea into something tangible and (hopefully) profitable is a feat that few can manage.

However, that is not to say it’s impossible. In today’s fast-paced world, opportunities for investment are aplenty, with seed capital, fund-raising platforms and networking opportunities available online at just the click of a button.

Whether you’re starting out in business or have been established for a number of years, you might consider taking out a loan to get some extra funding for growth and other projects. But do you have to get a specific business loan to do this or is it possible to use a personal loan instead?

Can I really acquire a personal loan for my business?

Yes, some personal loans can be used to fund a new or existing business.

However, before applying for any personal loan, you should check that the lender doesn’t impose any restrictions for business use.

It’s worth reading through the loan’s conditions beforehand to see what is allowed and what isn’t. Lenders will normally explicitly say what their personal loans can be used for, and some will allow commercial uses while others will not.

If you are unsure whether a lender allows you to use a personal loan for business purposes, you should be honest about your intentions as a borrower so the lender knows where they stand. Check the small print or, if you are still unclear, ask the lender, “Can you use a personal loan for a business?” instead of hiding your true intentions.

If lenders find out you used a loan for a prohibited purpose, then they could make you repay the borrowed sum and the resultant interest immediately.

When might I want a personal loan?

Many established businesses in need of finance will opt for a business loan, but some businesses, especially start-ups with limited or no trading history, could struggle to get one.

To be eligible for a standard business loan, most lenders will typically expect you to have a minimum of one year’s trading and they may also have minimum annual revenue requirements. Although some lenders do offer some specialist business loans for start-ups, not everyone will be eligible.

This is why some people may seek a personal loan for their business. For example, a personal loan may be one of the finance options to consider if you are wanting to grow your side hustle or your new business venture.

Unlike a business loan, a personal loan is paid to you as an individual. So, lenders will assess your eligibility based on your personal credit score and your personal financial situation, including your income, instead of your business finances and future forecasts.

Because a personal loan would be in your name as opposed to your business, this means you would be personally liable for paying it back regardless of how your business performed. As a result, you would need to be prepared to take this risk and be sure you can afford to make the repayments so you don’t damage your personal credit rating.

In some ways, personal loans can be useful ways to fund your business if you only need a small amount of funding, because applications can often be completed and approved relatively quickly.

When deciding whether to apply for a business loan or a personal loan, you will need to consider your own financial state as well as that of your business, and research different lending options to find the one most suitable for you.

Personal Start Up Loan

A type of personal loan that certainly can be used for business means is the government-backed Start Up Loan. Although they are targeted at businesses, these Start Up Loans are in fact unsecured personal loans.

They are designed to help new businesses to access funding, which can be used for a variety of projects such as marketing or for buying stock or equipment. Businesses can apply for loans of different sizes over different terms, and they can also access extra mentoring and support as they grow their business.

In your application you would need to provide information about your business and how you intend to use the loan, including a business plan and cash flow forecasts.

However, as with a standard personal loan, you would also need to pass a credit check and prove that you can afford to make the repayments, even if your business operations don’t go as planned.

Who qualifies for a personal loan?

First, to qualify for most personal loans, you’ll need a good credit score. You will also need some form of regular income to reassure the lender that you can afford repayments.

Although there are bad credit loan options available, these typically come with higher interest rates. These kinds of loans may also come with more restrictions, so borrowers may not be allowed to use these funds for business purposes.

If I get a personal loan and use it for business purposes, will it be tax-deductible?

To some extent, yes. With adequate documentation, the interest payments on your loan can become deductible business expenses concerning any tax on profits.

If you wish to take this route, you will need to update your books and keep regular records of your expenditure and, most importantly, how they relate to your business.

To help give you a better idea of personal business loans and how they may or may not benefit you, we’ve compiled a table of the pros and cons of using a personal loan instead of a traditional business loan.

Pros Cons
  • They’re fast. Unlike a business loan, a personal loan can be approved on the same (business) day.
  • Attractive rates. For those with an above-average credit score, interest rates on personal loans can be surprisingly low.
  • Accessible. Those looking to fund a start-up or a new business with limited history may not qualify for some business loans, but may qualify for a personal loan.
  • Less capital. Business loans are harder to come by for a reason – they offer much more money. A personal loan typically won’t go beyond £30,000.
  • Liability. You will be liable for repaying a personal loan in your name, regardless of the performance of your business.
  • Fewer tools. Some business loans can come with features offering expert advice and other tools to help grow your business and make it a success. A personal loan won’t come with these benefits.

Five Different Options

1. Outside investment

Not only has the online world opened us up to different avenues of investment, it’s also a great way to connect with angel investors and venture capital investors on social networks like LinkedIn.

2. Credit

Essentially another way to attain a personal loan, credit cards are convenient for getting a short-term cash injection in your company to purchase some equipment for example.

Bear in mind that easily approved credit cards often come with higher than usual repayment rates. A good way to get around this is to take up limited-time offers that can sometimes have 0% interest for a certain trial period and repay it before interest charges start to apply. Remember, if you do not repay the credit card inside the deal period, borrowing on a credit card is an expensive form of borrowing.

3. Credit Government grants

One of the safest and most attractive ways to fund a small business would be government grants. They cover a broad spectrum of businesses and can offer a valuable lifeline to those who wouldn’t normally have the funds or know-how to secure traditional loans or investment.

4. Crowdfunding

Kickstarter is just one of many websites designed for ambitious businesspeople. You could even create a GoFundMe me page with a set financial target. If your words are convincing enough, you may just reach your target – or even surpass it.

5. Save your disposable income

Sometimes, there’s nothing better in life than approaching things the old-fashioned way. Saving what’s left of your hard-earned money and putting it in a separate account could spawn the required lump sum in little to no time at all.

Whilst this is largely dependent on your income, it’s not a bad strategy if your needs are not pressing and you don’t want to risk the wrath of creditors. For moderate to high-earners with few outgoings, doing things this way can prove a shrewd move.

Is it worth it?

Like anything in life, when thinking about getting a loan you need to ask yourself: Do I really need it?

Whilst it is by no means guaranteed that a lender will approve a personal loan for business purposes, those who do their research and are honest about their goals may find lenders offering a range of personal loans that may be suitable for commercial uses.

As always, comparing lenders and different funding options is critical. You will need to consider how much money you want, how quickly you need it, and what your current situation is.

Whatever route you choose to take, remember to check your eligibility before applying as a rejected credit application or failure to repay any type of loan will affect your credit score and can result in severe financial repercussions.

About the author:

Finance Director at NerdWallet UK and business adviser to SME's Nic is spokesperson for small and growing businesses with a strong understanding of the financial needs of business Read more

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