A personal loan may be just the financing you need to bolster your business.
Image source: Getty Images.
For most business owners, there will come a point when you need more money than you have available. After all, you don’t want to miss out on the perfect opportunity to grow your business because you’re trying to bootstrap everything.
The obvious solution is a business loan, but those aren’t always the most convenient or accessible option. That’s why one popular alternative is getting a personal loan and using that to pay for your business. Let’s dive in to whether that’s allowed and if it’s an avenue worth pursuing.
Can personal loans be used for business?
Yes, you can typically use a personal loan for your business. That could be for any type of business expense, including purchasing equipment, paying the rent on a new storefront, hiring a contractor, or whatever else your business needs.
In fact, you can use a personal loan for just about any expense you have. Personal loans are versatile in that there’s very little you can’t do with them.
However, a lender can put restrictions on the ways you can and can’t use your personal loan. That’s why it’s always a good idea to double-check with the lender regarding its rules and restrictions. Fortunately, it’s unlikely a lender will have a problem with you using a personal loan for business purposes.
The pros and cons of a personal business loan
There are advantages and disadvantages to using a personal loan for your business instead of a business loan. Here are the benefits of a personal business loan:
- Easier to obtain -- The main factors in getting a personal loan are your credit score and your income, so it’s easier getting approved than it would be to get approved for a business loan.
- Less complicated application process -- Since a personal loan won’t require any information on your business, such as financial records, there’s less you have to do when you apply.
- Faster funding time frame -- The personal loan process, including applying for the loan and receiving the funds, can often be completed in a matter of days. A business loan is usually a longer process that could take weeks or even longer than a month.
- No collateral required -- With a personal loan, you only need to provide your personal guarantee that you’ll repay it. While your credit score will be damaged if you miss payments or default, you don’t need to put up any sort of collateral with the lender, such as your personal or business assets.
A personal business loan also has a few notable drawbacks:
- Smaller maximum amounts -- Most personal loan lenders will let you borrow $50,000 to $100,000 maximum. Business owners can borrow much more with business loans, provided the lender trusts that the debt will be repaid.
- Higher interest rates -- Although there are personal loans with low interest rates for borrowers who meet certain credit score and income requirements, business loans will typically have lower interest rates.
- Shorter terms -- Personal loans usually have terms of up to five years. With a business loan, you could have a term of 10 years or longer.
When to get a personal loan for your business
If you’re not sure which type of loan is the right choice for your business, there are a couple situations when a personal business loan is the best bet.
You’ve been in business less than two years -- Lenders usually want to see at least two years in operation and profitability before they’ll consider approving you for a business loan. If your business just got started, then a personal loan is a much more realistic option.
You’re borrowing $10,000 or less -- Personal loans can be for almost any amount, whereas business loans are generally for larger amounts because the lenders want to ensure they make some money from interest charges (although there are smaller business microloans available). If you don’t need to borrow that much, then a personal loan is a good choice, especially since it will also have a simpler application process.
When to apply for a business loan
Before you think about applying for a business loan, you need to make sure that you’ll qualify. While every lender’s requirements are different, most will want to see:
- At least two years in business
- Annual revenue of at least $50,000
- Business income of at least 125% of your monthly expenses with your projected loan payment included in those expenses
Assuming you meet those requirements, a business loan will most likely be right for you, because you could secure a lower interest rate than you would with a personal loan. In particular, these are the situations when you would definitely want a business loan:
You need $100,000 or more -- Whenever you’re looking at borrowing six figures or more for your business, you should focus on business loans. Lenders regularly issue business loans for over $100,000, and securing the lowest possible interest rate is even more important when you’re borrowing so much.
You need more than five years to pay back your loan -- Since you can get a much longer term with a business loan than with a personal loan, the former is the way to go if you want more time and lower monthly payments.
You’re getting the loan for something specific -- One big advantage of business loans is that there are all types of options available depending on why you need the loan. For example, you could get a business real estate loan to open a new location or an equipment loan for an important tool you need.
If you know exactly what your loan is for, then you may get a better deal by going with a business loan specifically intended for that purchase.
Other financing options for your business
Personal loans and business loans are far from your only financing options. Other popular options include:
Business credit cards -- Business credit cards can be an excellent financing option for business owners, especially when your business is just getting started. They include several helpful perks:
- Business credit cards are one of the easier business financing options you can get. Even if your business hasn’t made any profits yet, you could still get a business credit card courtesy of your income and personal credit score.
- You’ll have a revolving line of credit that you can reuse, as opposed to a loan that you can only use once.
- Many business credit cards have 0% intro APR periods that you can use to finance business purchases without paying any interest.
- You could earn cash back or travel rewards on your business spending.
Tapping into home equity -- If you’ve built up equity in your home, you can take advantage of that through either a home equity loan or a home equity line of credit (HELOC). This is considered one of the riskier ways to finance a business, because your home will be the collateral on the money you borrow. On the other hand, you’ll be able to borrow the money at a very low interest rate.
How to get a personal business loan
A personal loan could be exactly what you need to take your business to the next level, assuming you use it wisely. To maximize your chances of success, you should do the following before you apply for a personal business loan:
- Write a detailed business plan. This isn’t a requirement with a personal loan application like it is with a business loan application, but that doesn’t make it any less important.
- Determine exactly how you’re going to use the loan.
- Calculate how much you expect to profit to ensure that the loan is worth the total cost.
- Get your credit score as high as possible so that you can secure the lowest possible interest rate.
Once you’re all set and you know how much money you need, you can enter that amount, along with your credit rating, location, and the intended purpose of your loan, in the table on our best personal loans page.
With that information, we can show you lenders that could issue your loan plus some important loan details, including the term, APR, and monthly payment amount.
The Motley Fool owns and recommends MasterCard and Visa, and recommends American Express. We’re firm believers in the Golden Rule. If we wouldn’t recommend an offer to a close family member, we wouldn’t recommend it on The Ascent either. Our number one goal is helping people find the best offers to improve their finances. That is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.