Can Businesses Use Personal Loans?

NoSystem images/Getty Images: Illustration by Issiah Davis/Bankrate

Although personal loans are typically only for individual expenses, some lenders allow them to be used for business purposes. This option can be appealing for startups and small businesses that may not yet qualify for traditional business loans.

It’s essential to understand the potential risks and limitations of using a personal loan for business, such as lower borrowing limits and the impact on your personal credit. Before moving forward, check your lender’s policy and compare other business financing options, like SBA loans, online business loans, business credit cards and crowdfunding.

Can you use a personal loan for business?

Yes, in some cases, you can use a personal loan to start a business or make purchases for the company. However, not all personal loan lenders allow their loans to be used for business purposes.

The deciding factor is whether the loan agreement specifies that it allows business purchases or that it doesn’t exclude business use in its list of exclusions. To avoid trouble, ask the lender you’re considering whether they have restrictions for businesses before you apply.

Business owners may prefer a personal loan over a business loan because the process is faster and often more convenient than applying for a business loan. When applying for a personal loan, lenders review your credit score and income, and there’s generally little documentation needed other than a few paystubs and identification.

What’s the difference between a business loan and personal loan?

A business loan is a loan specifically used for business purchases, either for general purchases like operating expenses or specific items like equipment. 

On the other hand, a personal loan is a loan tied to your personal finances that you can use for nearly any purpose, typically for personal items like consolidating debt. Keep in mind that if you fail to make payments, the lender can go after your personal assets to repay the loan.

Consider the differences between personal loans and business loans.

Requirements for business loans vs. personal loans

Business loans tend to have more requirements for approval than personal loans. Personal loans have a lower barrier to entry, making them ideal if you don’t qualify for a business loan. 

Consider the different factors that lenders look at when approving your loan to decide which option is best for you.

Credit score requirements for personal and business loans

FICO credit score requirements are similar between personal and business loans. With personal loans, the minimum credit score requirement is often 610, but you can secure a personal loan with a lower score. For example, if your credit score is 580, lenders like Upgrade and Avant may approve your loan application.

By comparison, credit score requirements for business loans typically start in the 600s . If you want the highest odds of approval and the best interest rate, you’ll need a minimum credit score in the 700s. Typically, online lenders accept lower credit scores than traditional banks and credit unions.

Personal lenders largely care only about your personal creditworthiness, while business lenders may look at your personal and business credit scores. They consider your personal credit more if you’re a startup or haven’t established your business credit. 

What to consider when choosing a personal or business loan

If you’re starting a new business or entering an unfamiliar industry, a personal loan may be easier to qualify for. But personal loan amounts are generally lower than business loans, limiting how much funding you can get. Depending on your industry and startup costs, you may find that a personal loan won’t fully cover what you need like a business loan can. Business loans also tend to offer lower interest rates, which keeps your total borrowing costs minimal. 

If you can qualify for a business loan, the lower cost and business use of funding makes sense. But if you can’t get a business loan or don’t qualify for the lowest rates, a personal loan offers another option to get the funding your business needs.

Pros to using a personal loan for business

There are several pros of using a personal loan for business purposes:

• Fast funding: Many personal loan lenders offer same-day funding so borrowers can quickly handle business expenses.
• Lenient lending requirements: Compared to business loans, personal loans are easier to qualify for because lenders won’t scrutinize your previous business experience, your company’s finances or how long it’s been open.
• No collateral required: Unsecured personal loans don’t require collateral, so you can qualify even if you don’t have valuable assets. However, unsecured business loans can be difficult to qualify for.
• Reasonable repayment terms: Repayment terms for personal loans can range from two to 10 years.

Cons to using a personal loan for business

There are also cons of using a personal loan for business purposes:

• High interest rate: Personal loan interest rates range from 6.5 percent to 36 percent, but the average rate is 12.58  percent. By comparison, the average interest rate for business term loans range from 7.33 percent to 7.99 percent .
• Low borrowing limits: Depending on the lender, personal loan amounts are capped at $100,000, while business loan amounts can reach $5 million.
• No impact on business credit: Payment history for the personal loan has no impact on your business credit. That could be a good thing if you miss payments, but it’s a bad thing if you want to build your business credit.
• Personal credit score is at risk: Late or missed payments can lower your personal credit and prevent you from getting approved for other types of personal credit, such as credit cards and auto loans.

How to get a personal loan for business

The application process for a personal loan may be less involved than a business loan since the loan requirements are fewer.

Here are the steps to securing a personal loan for business use:

1. Confirm your credit score: Understand your credit score’s impact on loan approval, rates and terms. If you’re afraid your score is too low, raise it before applying or consider applying with a co-borrower.
2. Prequalify: Prequalification allows you to discover potential rates and terms without affecting your credit. Compare and assess loan types, rates and terms across lenders to determine which one offers you the best loan terms
3. Apply: After comparing lenders and loan offers, choose a lender and apply. Be prepared to submit the necessary documentation for identity and income verification.
4. Finalize: Upon approval, read through the loan agreement carefully  and sign loan documents to receive funds.

Alternatives to personal loans for businesses

If you’re not sure that a personal loan is right for you, consider what other funding options align with your business’s needs and goals. Alternatives to personal loans for businesses include:

• Business loans
  

  Business loans can be used for all kinds of business expenses, including equipment, real estate, inventory and supplies. Some lenders offer accessible requirements for approval, especially if you go with an online lender.  They work with various businesses and credit profiles, meaning business owners could secure bad credit or startup business loans.

  For example, Credibly’s working capital business loan requires a minimum credit score of 500, ranges from $25,000 to $600,000 and can be used for hiring, payroll, marketing and other immediate business expenses.

  Triton Capital also offers business loans from $10,000 to $500,000 that can be used for business needs, including purchasing equipment. The lender states it works with startups. As with all loans, the better the credit score, the better the interest rate. Triton’s minimum personal credit score requirement is 600.

• Business credit card
  

  Business credit cards function like personal credit cards, but they are restricted to business purchases. You can spend up to your credit limit, and each time you repay what you’ve borrowed, the credit line refreshes.

  Unlike some business loans, you don’t need a formal business structure to apply and qualify. And on-time payments will help build your business credit score.

  Because a personal guarantee may be required for a business credit card, if you can’t keep up with credit card payments, you are risking your personal assets.

• Crowdfunding
  

  Crowdfunding  allows businesses to acquire capital through donations. Unlike a personal loan, crowdfunding doesn’t require an application or credit check. You use a fundraising platform, such as Kickstarter or  Indiegogo, to launch an online campaign and collect monetary pledges that can be used to launch a business, product or project.

  There are four main types of crowdfunding: donation, debt, equity and reward. If you want to raise funds without repayment requirements or giving up ownership, donation- or reward-based crowdfunding are your best options.

  Unfortunately, crowdfunding doesn’t guarantee a specific amount, and depending on the platform, there may be fees.

• Equipment financing
  

  Equipment loans allow businesses to acquire necessary machinery, tools, vehicles and other types of equipment without a significant upfront financial burden.

  The requirements vary based on the lender, but established businesses and startups can apply. These loans are secured by the equipment itself as collateral. Because it’s a secured loan, lenders often offer lower interest rates than other types of business loans.  Loan amounts typically range from $5,000 to over $500,000, with terms spanning one to five years. Depending on the lender, a down payment of between 10 and 20 percent may be required.

• SBA loans
  

  SBA loans are term loans or lines of credit guaranteed  by the U.S. Small Business Administration Because of the SBA guarantee, lenders may be willing to work with you even if you don’t qualify for a conventional business loan.

  Each type of SBA loan covers a specific need, such as real estate purchases, working capital or expansion. The SBA sets low maximum interest rates and offers long repayment terms, making them appealing to small businesses.

  Examples of SBA loans include:

  • 7(a) for general purposes
  • 504 for real estate and equipment
  • Microloans for smaller needs of $50,000 or less

• Business lines of credit
  

  Like business credit cards, business lines of credit give businesses access to funds up to a predetermined amount. With the ability to borrow, repay and borrow again, lines of credit are ideal for short-term business expenses.

  They also work well if you know you’ll need financing in the future but don’t want to borrow right away. You can draw funds as you need them, rather than receiving a lump sum that you must repay immediately. Lines of credit also allow you to pay interest only on the amount withdrawn.

• Working capital loans
  

  Working capital loans aid businesses in covering day-to-day operations and expenses. They are particularly useful when businesses need to maintain cash flow during fluctuations, such as seasonal rushes or slowdowns .

  Although working capital loans offer fast funding of over $1 million and lenient requirements, they tend to have short  repayment periods like two years or less. They also tend to have higher interest rates than other business loans.

The bottom line

While securing a business loan to cover various financial obligations would be ideal, that isn’t an option for all businesses. A personal loan could be the answer to your funding troubles because they offer easier qualifications to get approved. However, personal loans may have lower loan amounts and higher interest rates than business loans. Be sure you explore the different types of business financing options before settling on a personal loan for business use.

Frequently asked questions

• Is a business loan the same as a personal loan?
  

  No, a business loan is not the same as a personal loan. Personal loans are typically reserved for consumer purposes, such as debt repayment or paying for a renovation. Business loans are designed to meet business needs, such as purchasing equipment or commercial real estate.

• How do you get a personal loan for business?
  

  To secure a personal loan for business purposes, consider multiple personal loan lenders and their qualifications for approval. Prequalify with several lenders to see what loan amounts, interest rates and terms you’re offered. You’ll also want to confirm that the lender you choose doesn’t have any limitations for loan usage. Some lenders may not allow you to use the personal loan for business purchases.  Once you choose a lender, apply, provide the necessary documentation and close the loan.

• Are there restrictions on what you can use a personal loan for?
  

  Yes, depending on the lender, there are restrictions on how you can use a personal loan. Some lenders may not approve a personal loan if it’s for business use. There could also be other restrictions, which will be laid out in the loan agreement.