Can You Use a Personal Loan for Business?
by Fundid on Dec 20, 2021 2:46:00 PM
Every business relies on a certain amount of working capital, which will allow you to meet overhead costs, invest in projects to help you grow or to get your new business idea started. This financing is generally available from two sources: business loans and personal loans. A question many business owners ask is: Can you use a personal loan for business expenses? The short answer is yes, but there are many considerations to think about when using a personal loan to support your business growth.
Personal loans are issued by a bank to individuals for a variety of purposes and are often used for home improvement projects or debt consolidation. Their structure means that while you might use your credit card for small, everyday purchases, a personal loan is better suited for larger, one-time purchases.
FURTHER READING: A Business Owner's Guide to Business Loans
A bank or financial institution also issues business loans, but their purpose is usually more narrowly defined and aimed at a particular aspect of your business. Some of the most common types of business loans include:
To qualify, you’ll have to show documentation regarding the current financial stability of your small business, which will include your business credit score.
Potentially, this means that personal loans can be acquired a bit more easily than business loans, which is why some choose to use personal loans to fund their business. But is this a good idea? Today, we’ll explore the possibility of using a personal loan to invest in business plans.
Can I Use a Personal Loan to Finance My Business?
If you’ve been putting personal money into a business, you’re hardly alone. According to one survey, 35% of small business owners have invested personal funds into their business. When you first start out, using personal funds to start a business may even be essential since you’re less likely to qualify for other types of financing.
Does that mean you can use a personal loan to start a business? Absolutely, but always make sure to check with your financial institution before applying for the loan.
Some lenders may impose restrictions on the loan that prohibit you from using it for business purposes. Otherwise, personal loans can be used to finance your business, both for startup costs and ongoing expenses.
How Does a Personal Loan for Business Work?
When you apply for a personal loan, the lender will review your personal financial information to determine your eligibility. You can expect to present lenders with information that includes:
- Your personal income
- Your credit history
- Your personal assets
Personal loans are usually unsecured, which means you won’t have to put up your house as collateral. The loan is usually between $1,000 and $50,000, though some lenders may provide even larger amounts depending on your credit and financial history.
The loan can last between 12 and 60 months, but don’t forget that since this is a personal loan, you’ll be held personally liable for the loan regardless of whether your business succeeds.
Can I Use a Personal Loan to Pay for My Business Expenses?
Can you use a personal loan for business-related expenses? Personal loans are actually fairly broad, so once you have the money, you’re free to use it in any way you deem appropriate. This freedom means that you can use a personal loan for anything ranging from inventory to marketing to payroll.
What are the Pros and Cons of Using a Personal Loan to Fund a Business?
Taking a personal loan to start a business can be a wise decision in some circumstances — but not all. There are several factors to consider before applying for a personal loan for your small business.
Positively, personal loans offer some great benefits:
- Fast approval
- Low interest rates
- Easier to obtain for new startups
For example, new businesses don’t have an extensive financial history to lean on when applying for a business loan. This lack of history means that personal loans might be more easily obtained by business owners than going through the process of applying for a business loan.
On the other hand, there are some drawbacks to using a personal loan to fund a business:
- Lower amounts than business loans
- You are personally liable for the loan regardless of your company’s success
- Personal loans don’t come with any additional merchant services
In other words, personal loans are simply not designed to be used specifically for business. Though they are simpler, not every business owner should rely on personal loans when funding a business.
Does Taking a Personal Loan to Start a Business Hurt Your Personal Finances?
Anytime you take out a loan, it has the potential to impact your personal finances and credit history. Taking out a personal loan to start a business won’t negatively impact your finances, and if you pay back the loan on time, you might even improve your credit score along the way.
Of course, a personal loan also means that you’ll be held personally liable for the loan regardless of whether your business thrives or withers. If you fail to make regular payments, this will significantly impact your credit score and personal finances and could even jeopardize your eligibility for loans in the future.
Should You Use a Personal Loan to Start Your Business?
Should you pursue a personal loan or a business loan to get your business off the ground? Let’s consider when it makes sense to use each loan type.
When It Makes Sense to Use a Personal Loan
A personal loan is great for businesses that:
- Need less than $50,000
- Have the means to pay back the debt on time
- Are just starting out and lack the credit for a business loan
Since personal loans are also easier to acquire, business owners can usually count on having working capital sooner with a personal loan than a business loan, which is helpful if you need to fund a time-sensitive project.
When It Makes Sense to Get Financing Through Your Business Instead
When should you skip the personal loan and get a business loan? You should consider a business loan if you:
- Need larger loan amounts
- Want to avoid personal financial liability
- Need to access additional merchant services
For example, some business owners may wish to open a merchant account in order to process credit cards or ACH payments, which might be in some way connected to a business loan.
Alternatives to Personal Loans for Business
If you’d prefer to avoid a personal loan altogether, you can look into several alternatives. These include:
Small Business Loan
Small business loans work similarly to personal loans but are designed for businesses specifically.
Business Line of Credit
Business lines of credit allow you to make purchases and pay the bill later, based on a predetermined credit limit and set interest rate.
Business Credit Card
Business credit cards work like consumer credit cards and are often attached to business bank accounts.
Business grants are funds given to your business and don’t require repayment, so long as you meet the criteria of the grant provider.
People Also Ask
The following is another question we often hear:
Can You Use a Business Loan for Personal Expenses?
While you can use a personal loan for business expenses, but can you use a business loan for personal expenses? Unfortunately, no. Not only will this land you in hot water with your lender, but you may find yourself guilty of tax fraud. Never use a business loan for personal purchases or other non-business spending. In general, it’s best to keep your personal and business finances as separate as possible.
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