Can You Use Personal Loans For Business?

Accessing the capital your business needs isn’t always an easy task. In 2021, just 31% of small businesses received all of the funding they applied for, down from 51% in 2019, according to a report by the Federal Reserve.

Some business owners may look to personal loans when they have problems getting a small business loan. Using personal loans for business is a more popular option than many people realize. The Fed report points out that 13% of business loan applicants in 2021 applied for a personal loan to fund their businesses.

There are cases when a personal loan can work as a business financing option, but you need to carefully assess the benefits and drawbacks before using this funding strategy.

Can You Get a Personal Loan for Your Business?

You can use personal loans to finance just about any legal personal expense, including debt consolidation, home improvement projects, medical bills, weddings and unexpected emergencies. Some lenders let you use personal loan funds to pay for business expenses, too.

Whether or not you can use a personal loan for your business depends on the lender. If you intend to use a personal loan for business purposes, review the lender’s restrictions before you apply.

How Do Personal Loans for Business Work?

A personal loan is a type of installment loan for which you, the business owner, are liable to repay. The loan may show up on your consumer credit reports—often with all three major credit bureaus—and it may impact your personal credit score, depending on how you manage the account.

Personal loans are typically unsecured, which means they require no collateral. Some lenders offer secured options that require collateral. Lenders can repossess the collateral if you fail to repay. You might be able to lock in a lower interest rate and better terms with a secured loan, depending on the lender.

After a lender approves you for a personal loan, you’ll receive a lump-sum payment with your loan proceeds. Once you receive the funds, they’re yours to use as you see fit—as long as you don’t violate the lender’s loan usage rules.

Personal loans typically feature fixed interest rates and fixed monthly payments. This means your monthly payment should remain the same throughout the entire repayment period.

Benefits of Using a Personal Loan for Business

• Easier qualification standards: It’s not always easy to qualify for a business loan, especially if you’re running a startup, you have limited revenue or you face other borrowing challenges. Qualifying for a personal loan could be easier, especially if you have good credit and solid personal income. There are also personal loans for bad credit, but it’s important to note that the interest rates and fees are often higher.
• Flexible funding: Personal loans are flexible funding options you can use for a wide range of expenses. Be sure to review the lender’s terms and conditions for any loan usage restrictions before you apply.
• Funding speed: Depending on the lender, after approval you may get the loan proceeds within days or even just a few hours. While some business lenders offer similarly speeding funding, it’s not unheard of for the process to take weeks with certain business loans.
• Unsecured financing: Secured personal loans are available, but unsecured loans are more common.
• Competitive interest rates: When you have good personal credit, a personal loan might feature lower interest rates compared with other types of financing. But it’s important to compare loan offers because there’s no guarantee a personal loan will be the most affordable financing option available for your small business.

Drawbacks of Using a Personal Loan for Business

• Personal liability: When you take out a personal loan for your business, you are on the hook if your company fails to repay the debt as promised. Your personal credit could suffer if there are late payments or a default occurs. The lender might even sue you and seize personal assets in the event of nonpayment.
• Future borrowing limitations: Even if your business pays on time, you might have trouble borrowing money for personal reasons in the future if you take out a personal loan for business. More debt on your personal credit report will increase your debt-to-income (DTI) ratio. A higher DTI could make it difficult to qualify for future mortgages, auto loans and even some credit cards until your business repays its debt.
• Tax deduction limitations: The interest you pay on a business loan is tax deductible. That’s not the case with personal loans unless you use them 100% for business purposes. If you use any portion of a personal loan for personal expenses instead of business expenses, you may not be eligible for a full tax deduction. Consult with a certified tax professional for tax-related questions.
• Lower interest rates available: If you can qualify for a business loan, particularly a U.S. Small Business Administration (SBA) loan, you might be able to borrow money at a lower interest rate. Of course, rates can vary depending on your credit and other factors. Therefore, it’s always important to shop around and make sure you get the best deal available.

Other Ways To Finance Business Expenses

A personal loan is not the only way to secure working capital for your business. There are several other financing options to choose from if you’re looking for ways to fund your business-related goals.

Small Business Loan

If you have been in business for at least six months and have a credit score of at least 560, you might be eligible for a small business loan. Of course, higher credit scores, higher revenue and longer time in business, among other factors, may help you qualify for more favorable business loan offers.

We put together a list of the best small business loans to make your research easier.

Small Business Credit Cards

Small business credit cards can be helpful tools when you’re working to establish business credit, keep your business and personal finances separate, and solve short-term cash flow needs. If you repay your full balance every month, you can typically avoid paying interest charges.

Business credit cards can also be a good option for startups as the qualification standards may be easier to satisfy compared with business loans.