Personal loans commingle business finances with personal finances, but if you don’t have any business credit history, it may be the easier route. Keep in mind that because personal loans don’t require business documentation, you’ll get access to funds much sooner than you would with a business loan.
A personal loan for business is a loan for which the borrower is personally liable, even though the funds are going to be put towards small business costs.
We're very fortunate to live in an era with limitless technology at our fingertips.
At no other point in history has it ever been so easy to start a business:
All it takes is an idea, a laptop with an internet connection, and some good old-fashioned hard work!
Still, even if you do get your business off the ground on your own, you may find saving the money to scale and expand to prove more challenging yet.
If the only thing keeping you from growing your business is money, you may have decided to explore the world of business loans and business financing.
Lenders must use strict qualifying criteria and underwriting processes to avoid investing in businesses that fail.
Although this strategy helps them mitigate their risk, a consequence of such stringent eligibility criteria is that new businesses lacking a credit history can have trouble getting access to funds.
Lucky for us, the same technological advancements that have made it so easy for entrepreneurs to find success are also changing the way we shop for business loan products.
If you do encounter trouble qualifying for a small business loan, you can take comfort knowing you have other options:
A personal loan may be the best loan for your small business.
Here’s the key difference between personal loans that can be used for business and business loans:
Lenders put your business under a microscope when you apply for a business loan.
You may be asked to produce a business plan, your personal and business credit histories, multiple years of personal and business tax returns, financial statements, businesses licenses, and more.
Some business loans, called secured loans, require collateral like property or inventory to back the loan in case it goes into default.
Business loan contract terms may even require that you use funds for a specific purpose.
When applying for a personal business loan, your business’s credit history and financial outlook are not scrutinized.
Instead, your personal finances including your income and credit history are reviewed because you are personally liable for the loan.
It’s much like taking out a personal loan for any other big purchase like a home renovation project or a trip abroad.
After getting the stamp of approval, the lender deposits funds into the account of your choosing.
And you can use your loan any way you wish!
You may be thinking:
This all sounds too good to be true… How much is it going to cost me?
There’s good news here as well if you have a good credit score.
Interest rates for personal business loans are competitive and can range anywhere from 4% to 39% APR.
Keep in mind, interest and fees vary depending on the lender you choose to borrow from and your credit history.
Poor credit will stick you with higher interest and fees.
It’s smart to shop around for a loan that will cost you the least amount of money in interest and fees before making a decision.
You may even want to work on cleaning up your credit history to nab the lowest rate possible.
Besides interest, other costs to consider when shopping for a personal loan include origination fees and other small expenses hidden in the fine print.
Let’s talk about these costs in detail:
A lender may charge an origination fee to process your loan.
Expect the origination fee to be subtracted from the loan amount before you get the lump sum.
Your credit history is used to determine your origination fee amount, it can range anywhere from 0.99% to 6%.
For example, say you apply and get approved for a $10,000 loan.
If the origination fee is 2%, you’ll pay $200 for the origination fee.
The fee of $200 will be subtracted from your loan, and you’ll get $9,800 deposited into your account.
Be sure to factor in the origination fee when deciding how much to borrow since it can take a chunk out of the money you receive.
Learn more about Why Personal Credit Still Matters for Business
Small print costs on small business personal loans are usually minimal.
In any case, read through your loan contract carefully before signing on the dotted line to avoid an unpleasant surprise down the road.
Lenders may charge a fee if you pay late or make a payment that’s returned for insufficient funds, for example.
A responsible borrower will understand the costs and implications if something unexpected happens.
Another small print fee to know about is a prepayment penalty.
Prepayment penalties are fairly uncommon for personal loans, but it’s an extra cost you’d probably want to know about ahead of time.
A flat fee or percentage prepayment penalty may be charged by a lender if you make advanced payments or pay a loan off completely before the repayment term ends.
Say you’re lucky enough to experience a cash windfall that can repay the entire debt:
It’s still going to cost you if the loan contract includes a prepayment penalty.
Alternative lenders that operate primarily online have exploded onto the scene offering loan products with limited fees across the board.
It’s possible to find a personal loan for your business with no origination fee, low fine print fees, and no prepayment penalty—
If you do your due diligence, that is.
Learn more about The Best Banks for Small Business Loans May Not Be Banks At All
A personal loan for business makes sense for business owners who have limited business history, but a high personal credit score.
The truth is, you’ll probably have trouble qualifying for a low-cost personal business loan with bad credit.
Later in this post we’ll cover a few ways to improve your credit score to strengthen your loan application.
A personal loan for business also makes sense if time is a factor for you.
The process of turning in a personal loan application and getting approved is often faster than a small business loan.
You won’t need to present as much paperwork which means the lender has less financial information to verify.
As mentioned earlier, some business loans require collateral to protect the lender if the loan goes into default.
If you prefer not to pledge collateral to back your loan (or you don’t have any collateral to pledge) the good news is that personal loans are usually offered in good faith, and your signature on the agreement is enough.
As with any major financial decision, you should carefully weigh the pros and cons of using a personal loan to operate your business before taking on debt.
Think of the loan as your own investment in the business.
Would you lend to someone with your business plan and model?
Be honest with yourself here. You should feel confident your business idea will perform well enough to make the loan worthwhile.
Here are the major advantages and disadvantages to consider before moving forward:
Business credit history is one of the most important factors used to qualify you for a traditional small business loan.
New businesses without an established credit history will have trouble in this area.
The personal loan can be a shortcut to securing business financing because only your personal credit history is necessary.
Learn more about Funding Your Startup with a Personal Loan
The application process for a personal loan requires less paperwork than a small business loan.
Some online lenders can get you approved within 24 hours.
Funds can hit your account in a matter of days.
Learn more about the Fastest Way To Get A Business Loan
If you have a strong personal credit score, you can get a personal loan with a low interest rate.
The terms of personal installment loans are simple:
You get the lump sum and make scheduled payments until the term ends, and fees are usually minimal.
Taking out a personal loan for your business will marry your personal and business interests.
This can be a bad thing if you run into financial difficulty in the future.
Non-payment of your personal loans will impact your personal credit history and possibly your personal assets.
Not pledging collateral limits the amount you can borrow, and you may have trouble getting a personal loan for a large amount.
This can be huge:
If your business goes under or you have cash flow problems, you’re still personally on the hook for your loan payments.
Qualifying criteria varies by lender.
Lenders will look primarily at your income and credit score to determine if you’re a worthy borrower.
The FICO score model is the scoring metric many lenders use to determine creditworthiness.
FICO scores range from 300 to 850.
Approval for a personal loan is possible with a score in the high-500s.
However, approval for a low interest rate and low fees will require a significantly stronger credit score.
Ultimately, a score in the mid-700s or higher will get you the best deal.
If your credit score still needs some work, paying off some of your credit card debt can give you a little boost.
The most influential aspect of your credit score is your record of paying on time.
You probably won’t be able to rectify late payments overnight unless you dispute and have them removed.
However, the second most influential aspect of your credit score is the amount you owe in total and your revolving credit utilization.
This is where you may find some opportunity to improve your score.
Credit utilization refers to how much revolving credit you are using relative to total credit available.
For example, if you have a $5,000 credit limit and are carrying a $2,500 credit card balance, you’re utilizing 50% of your available credit.
Reduce your credit utilization to below 30%, and you may see some score improvement.
Many lenders now offer online application processes that allow you to electronically submit documents.
Some systems even automate pre-approvals which is good news for someone who wants a quick answer.
In order to expedite the process, you should have certain documents ready before applying for a loan.
Here’s what you’ll need to apply for a personal loan: