Personal Business Loans: What You Need to Know

Personal Business Loans: What You Need to Know

Small business owners have to deal with many obstacles. But the biggest one is raising startup capital. A personal loan for business may make sense for those who get affordable interest rates. Personal business loans are funds borrowed from banks, credit unions, or online money lenders and can often be used to finance your business.

Most personal loans are unsecured. This means that you don’t need any collateral and usually pay monthly installments for 1 to 7 years. As long as the lender doesn’t restrict personal loans, they can be used to purchase equipment and inventory, launch marketing activities, and other expenses incurred when starting a business.

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Table of Content

 

What is a Personal Business Loan?

A personal loan for business is a loan from a bank to a person who can’t get a loan for another company. In addition, such business loans don’t require a fixed monthly repayment and have a repayment period of 2 to 5 years. It is ideal for new business owners who don’t know how long it will take to make their business work.

Just make sure that there are no pressure restrictions that may prevent you from using your personal loan for business purposes. Otherwise, you will violate the contractual agreements, leading to serious problems.

How Do Personal Loans for Business Work?

We are very lucky to live in a time when we have endless technology at our disposal. It was never so easy to start a business. All you need is an idea, an Internet-connected laptop, and efforts. But even if the business is pushed back on its own, it will be more difficult to save money for scaling and expansion. You may need a personal loan for business.

Personal loans are a combination of business and personal funds, but this may be easier if you don’t have a business credit history. Remember that a personal loan doesn’t require business documents and may be able to raise funds faster than corporate loans.

A personal business loan is a loan in which the borrower is personally liable, although the funds are used to cover the expenses of the small business.

How to get a personal loan for business use?

Regardless of where you get your personal loan for your business, it is advisable to take the following steps:

Check the credit

When taking out a personal loan, your credit rating (not the company) decides on interest rates and maturities. Therefore, you can take the time to clear your credit information and improve your score before taking out a loan.

Prequalify to check eligibility

A reputable online lender can check your eligibility and get an offer without strictly checking your business credit information. All you need to do is enter the basic information about yourself and the desired loan.

Compare APRs and terms

Once you know your rights and potential loan details, you can continue shopping at banks, credit unions, and other financial institutions. In addition, the APR considers both the interest rates and the loan fees. So, always compare the APR between the lenders.

Select the best loan

Once you have found the best deals on your personal business loan, start collecting identity verification and financial documents such as payment receipts and tax certificates.

Close on the loan

In this step, you will go through the personal loan process with your new lender and wait for the money to get to your selected bank account.

Benefits of using a personal loan to start a business

A personal loan supports your business in various ways, including financing new equipment, increasing inventories, and planning to expand your financing. Other advantages of using a personal loan to start a business are:

  • Flexibility

You can choose between different types of loans depending on your business needs. Various government programs offer commercial loans to open, expand, and modernize facilities.

  • Low rates

Banks, unlike private lenders, have low-interest rates. This is because various factors are taken into account. These are the term of the loan, the viability of the business model, the enterprise’s financial condition, and the borrower’s creditworthiness.

  • Easier to qualify

Many banks offer unsecured loans for small businesses. Business owners can easily access these loans and support their businesses.

  • Fast funding

You can speed up your business funding by setting up another facility or buying the necessary equipment. In addition, the owner has the right to spend money according to their wishes. Therefore, the funds can be used following the needs of the enterprise.

Drawbacks of using a personal loan to start a business

Personal loans may be a good option for some, but they are not the right choice in all situations. Here are some negative aspects that you should consider before taking a personal loan to start a business:

May not receive a full tax deduction

Interest expenses on a personal loan are usually not deductible, unlike interest expenses on commercial loans. So to get a full deduction, you need to ensure that you don’t spend part of your loan on other expenses.

Personal credit or assets could be at risk

If a personal loan for business is tied and secured to personal assets, such as a car or apartment, the lender can pledge these assets in case of a default.

Small loan size

A personal loan is often only $2,000 to $50,000 compared to corporate loans. The size may be just right for small startups, but if you own a more established company or are planning a large acquisition, you should look for a personal loan that provides more financing.

Shorter repayment terms

A personal loan often has a term of between 1 and 7 years. However, as a rule, SBA has the longest repayment period, ranging from 5 to 25 years.

Best Personal Loans for Business

Are you looking for a loan to cover your business expenses? Traditional commercial lending is often tricky. If you are worried that the traditional screening for business loans has not been passed, why not consider a personal loan? 

By using personal credit scores and assets instead of companies, you can effectively present a different risk profile to a weak financial institution. In addition, you can use your personal loan funds for the business’s cost.

Rocket Loans

Rocket loans are available on the same day for loans under $ 25,000. Therefore, a regular application, unlike a regular financial institution, takes 2-5 business days. There is also an origination fee, which can be lowered to about 1%. 

In addition, Rocket Loans has received a lot of customer feedback on its products and how to deal with borrowers. It is a good choice if you are looking for a reliable lender to get your business on track.

  • Loan amounts: $2,000 to $45,000
  • Loan repayment terms: 36- or 60-month
  • Interest rates: 5.97% to 29.99%
  • Speed: as soon as the same day
  • Minimum credit score: 580

Rocket gives up to $45,000 and may be best suited for people with a repayment period of fewer than 5 years.

Prosper

Proper has made it clear in advance which requirements must be met to obtain a loan. Therefore, it is recommended for entrepreneurs who have a decent loan and want to avoid the exam. 

It is also one of the few financial institutions that accept a guarantor. However, Prosper has one of the highest launch rates. Screening requires a credit card rating of 630 points, so there may be more advantageous campaigns.

  • Loan amounts: $2,000 to $40,000
  • Repayment period: 3 and 5 years
  • Interest rates: 7.95% to 35.99%
  • Speed: up to five business days
  • Minimum credit score: 630

Proper is good for those who have good credit (FICO 630-719) with a credit history of 2 years, are interested in equity financing, and want to add a co-borrower to the application.

Avant

The biggest advantage of Avant is that it is suitable for self-employed borrowers, which is a rarity. In other words, even those who are already self-employed are eligible.

However, you will need a document to prove that you have a stable income. In addition, Avant was settled in 2019 in a lawsuit with the Federal Trade Commission (FTC) for payment, which can be expensive for creditworthy borrowers.

  • Loan amounts: $2,000 to $35,000
  • Repayment terms: 24 to 60 months
  • Interest rates: 9.95% to 35.99%
  • Speed: as soon as the next business day
  • Minimum credit score: 580

Avant can claim a personal loan for business up to a score of 580, so it is recommended even for people with a low credit rating.

Upstart

If the borrower doesn’t pay the full amount of the monthly payment within 10 calendar days from the payment date, Upstart will charge a late payment fee of 5% of the overdue amount or $ 15, whichever is higher.

Upstart doesn’t impose a prepayment penalty on a borrower who wishes to make an advance payment.

  • Loan amounts: $1,000 and $50,000
  • Repayment period: 3 and 5 years
  • Interest rates: 3.09% to 35.99%
  • Speed: 1 to 4 business days
  • Minimum credit score: 600

Upstart is suitable for people with a small credit history and moderate creditworthiness.

Business loans vs. personal loans

Personal Business Loans: What You Need to Know 2

It is easy to invest in a business. But it isn’t easy to decide between a business loan and a personal loan if you need to borrow money. Business loans vs. personal loans – what to choose?

Eligibility requirements

Personal loans are recommended for new businesses because there is a possibility that the transaction records are insufficient. The loan for business will not be verified.

Key takeaways

  • Personal loans and business loans are the two most common types.
  • A personal loan can finance various expenses such as medical emergencies, wedding and vacation planning, etc.
  • Business loans are used to raise funds in various aspects of the business, including business expansion, capital injection, and car purchases.
  • Loans for individuals are transferred with a minimum of documents, but loans for businesses require the presentation of documents.

Risks

A personal loan lets you and your finances be held accountable if something goes wrong. A business loan will be used for your business, and your company will be responsible if you can’t repay the borrowed amount.

When is it a better idea to use a business loan?

As an entrepreneur, you have several options for obtaining funding for your business. You can support your business with your savings. You can find investors who will finance you in exchange for ownership of your business.

Alternatively, you can apply for a loan for business from a financial institution like a bank. When a company receives a loan, it is responsible for repaying the loan amount and interest following a set schedule.

Business loans are very effective for meeting the need for working capital and expanding your business. You can maintain cash flow even in difficult times. Business loans help improve financial stability during the non-repayment period when economic conditions change.

Determining whether it is the right time to take out a loan is a complex task, and you need to fully understand the type of loan you are interested in, your current financial situation, and what you want to do with this money. If you want to save your company or take out a loan on a spontaneous whim, you should rethink how to do it.

When is it a good idea to use a personal loan for small business purposes?

According to a 2020 Witch Tree survey, about two-thirds of business owners need more than $10,000 to start a business. Getting a loan for starting a business is not an easy task because it can be difficult to consider a small business loan. This is one of the reasons why entrepreneurs use personal loans to cover their expenses.

So, should I take out a personal loan for a small business? The short answer is – YES. Such loans can also be used to cover the costs associated with starting a small business. If you pass the personal loan exam, you can use it freely.

If you are starting a small business, you can cover everything from consumables to wages and rents with a personal loan. However, you should consider doing this at the lowest possible cost for yourself, i.e., taking out a loan at the lowest possible interest rate.

Alternatives to personal loans for business

Personal loans can be used for almost all purposes. They may be the most affordable and convenient option in some financial situations. To learn the other loan options available, let’s look at the various alternatives to personal loans below.

  • SBA loans

SBA allows small and medium-sized businesses to obtain the necessary loans by guaranteeing the loans provided by commercial and financial institutions from the government. The lender issues a loan and, in case of a default, SBA repays up to 85%. Since it is a bank loan, apply for it at the bank and pay off the loan to the bank.

  • Business lines of credit

The personal business line of credit is a card-like mechanism that allows you to use your credit line as needed without following a fixed repayment schedule. However, personal lines of credit may have lower interest rates than a credit card.

The disadvantage of this personal loan alternative is that additional fees may apply to a credit card. The lender may charge an annual or monthly fee if you comply with the line of credit. On the other hand, a credit card that requires an annual membership fee has advantages such as cashback on every purchase.

  • Business credit card

With business credit cards, you can shop and repay what you borrowed in small increments or over time. No interest will be charged if you repay the full amount within a month.

Unlike lump-sum payments for personal loans, a credit card offers revolving credit slots. So, you can use as much as possible within the pre-established credit card limit. You also have the freedom to pay as much as you want for your debts, at least if you have monthly savings.

  • Crowdfunding

Crowdfunding is another source of funding that usually makes a profit when a product goes on sale. This funding path is similar to launching your first promo page and will be interesting. It’s a great way to test your business.

Crowdfunding has several advantages. But if you are interested in this, you should keep in mind that some offer limited-time funding, some don’t get funding until they reach their goals, and others act as a long-term community website. Be sure to read the fine print to really understand whether you will get everything or nothing if you go this way.

Conclusion

If you are serious about starting your business or raising money to grow your business, compare a personal loan for business to find the best interest rate. Especially if you have to pay back in a few months instead of a few years, your monthly payments can be high, and you may run out of space.

Take into account all the factors that affect you, such as how much you can borrow, how much interest you have, how much you pay each month, how much you will be charged, how long the repayment period will be, and so on.

If you already have a deal with a bank, it may make sense to take out a private business loan there. But there are also many other online lenders competing for your business.

FAQ

Is it easier to get a business loan or a personal loan?

Personal loans are easier to get than business loans. Lenders usually only consider your personal credit score and finances when deciding whether to give you a loan. However, corporate lenders are likely to review your personal and business credit, business plan, and many other financial reports and records of your company, which can be time-consuming.

Are there personal business loans for bad credit?

Even borrowers with low creditworthiness and companies without a credit history can find it easier to get a personal loan by increasing their creditworthiness. You need a personal score of at least 500 to get a low credit score loan for a business.

What credit score is needed to get a personal loan?

According to an anonymous dataset pre-extracted by NerdWallet users, the minimum credit score for personal loans is usually between 600 and 640. Still, a high credit score doesn't mean you pass the verification or borrow at a low-interest rate.

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