Can You Use a Personal Loan for Business Expenses?
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If you’re launching your own venture, you may consider a personal loan for business expenses, instead of a traditional business loan. Personal loans and business loans come with their own benefits and drawbacks, so weigh your options and learn about alternatives before borrowing funds for your business.
Yes, you can use a personal loan for business costs
Between inventory and LLC filing fees, business startup expenses can add up. About two-thirds of business owners will need more than $10,000 to start their business, according to a 2020 study by LendingTree researchers. Getting a loan to open a business is no simple task, as it can be difficult to qualify for small business loans. That’s one reason why business owners turn to personal loans to cover expenses.
Personal loans are lump-sum loans that are repaid in fixed monthly payments over a set period of months or years. They are typically unsecured, meaning they don’t require collateral, although secured personal loans do exist.
Unlike business loans, personal loans are issued to you as an individual rather than your business. Borrowing a personal loan to pay for business expenses means that you’re putting your personal credit on the line if you can’t repay the loan. Compare your options in the table below:
|At a glance: Business loans vs. personal loans|
|Business loan||Personal loan for business|
|What is it?||An umbrella term for loans that are issued to a business, including SBA-guaranteed loans, bank loans and equipment financing, for instance.||A lump-sum loan that’s issued to an individual and is repaid in fixed monthly payments. Personal loans are typically unsecured, which do not require collateral.|
When is it a good idea to use a personal loan for small business purposes?
- You’ve exhausted other financing avenues, like business loans, business credit cards and crowdfunding. Using a personal loan to start a business is a potential avenue for funding when traditional business loan requirements are holding you back.
- You have good personal credit and can secure a low APR. You should only take out a personal loan if you can get favorable terms. Use LendingTree’s online loan marketplace to comparison shop for the lowest APR for your financial situation.
- You are confident in your ability to repay the loan. Personal loans are issued to individuals, not businesses. If your business goes under, you’re personally responsible for repaying the loan.
Pros and cons of using a personal loan for business expenses
When compared with business loans, personal loans offer fast funding and a simple application process. However, that convenience comes at a cost: When you take out a personal loan to start a small business or pay for business costs, you’re betting your personal credit on the success of your business.
Weigh the pros and cons of using a personal loan for business investment in the breakdown below:
|Using a personal loan for business|
|It is easier to qualify for a personal loan than a business loan, particularly for new businesses that can’t get traditional funding.||You’re putting your personal credit on the line. And with a secured personal loan, you would be risking a personal asset if you can’t repay the loan.|
|Personal loans offer fast funding. You will likely get funding within a few days of approval.||Personal loan interest isn’t tax-deductible, unlike business loan interest.|
|Typically, you don’t have to put up collateral like business inventory, although secured personal loans are an option.||Personal loans are typically only worth up to $50,000, although certain personal loan lenders do offer loans for up to $100,000.|
|You can use the funds for virtually anything, including a mix of business and personal expenses.||APRs tend to be higher than they are for business loans. Personal loan APRs typically range from 10%-25%, but can be higher for subprime borrowers.|
5 alternative ways to finance your business venture
SBA loans are long-term, low-interest loans that are guaranteed by the Small Business Administration. SBA loans may be easier to qualify for than other types of business loans. There are three types of SBA loans: SBA 7(a) loans, DC/504 loans and SBA microloans.
An SBA 7(a) loan can be used for a variety of purposes, including:
- Working capital
- Debt refinancing
- Marketing and advertising
- Hiring expenses
- Tools and equipment
- Franchises and new construction
DC/504 loans are strictly for real estate and equipment purchases. SBA microloans, as the name suggests, come in smaller amounts (up to $50,000).
Business lines of credit
A business line of credit allows business owners to borrow money on an as-needed basis rather than take out a lump-sum loan. Like a credit card, business lines of credit have a revolving limit. And like business loans, you may need a certain amount of time in business and revenue requirements in order to qualify.
Business lines of credit can be secured or unsecured, although unsecured lines of credit may result in higher interest rates. Plus, you may have to sign a personal guaranty, which means that you’d be personally responsible to repay the amount borrowed if your business goes under.
Working capital loans
If you simply need a loan to hold your business over during a lull, consider a working capital loan. This allows you to borrow from your working capital (your current assets minus your current liabilities). With this type of business loan, you can keep operating during times of reduced business activity and repay the loan when business is back at its peak.
Business equipment is a large expense, and if your business is just starting out, you might not have the capital to purchase needed equipment like construction vehicles, commercial ovens and manufacturing equipment, for example. That’s where equipment financing companies come in.
Equipment financing is more expensive than simply buying the equipment outright, since you’ll have to pay back the amount borrowed plus interest.
Crowdfunding websites like Kickstarter and GoFundMe allow you to raise business funds from the general public. Commonly shared on social media to reach a wider audience, crowdfunding pages can help small businesses that are struggling to pay for expenses.
Crowdfunding is a savvy option because it’s not a loan that needs to be repaid. However, there’s no guarantee that a crowdfunding campaign will be successful. Plus, you may have to pay taxes on the money you receive.