If you plan to start a business, you have a difficult road ahead of you. One of the biggest roadblocks is finding financing.
According to the Federal Reserve Bank of New York’s Small Business Credit Survey, 58% of startups that have been in business for two years or less reported challenges getting credit or money to grow. That problem can limit a company’s development and profitability.
If you need financing, applying for a personal loan for business expenses is a common approach. However, it’s important that you understand the benefits and drawbacks before moving forward.
Taking out a personal loan for business capital
In its Report on Startup Firms, the Federal Reserve Bank of New York found that half of all new businesses fail within five years.
Don Gooding, the founder of Four Colors of Money for Entrepreneurs and a former venture capitalist, said the failure rate plays a significant role in the availability of financing. As a new business, it can be difficult or impossible to get a traditional business loan.
“Many lenders won’t talk to you until you’ve been in business for two to three years because it’s hard for them to tell if you’ll be on the surviving side of the statistics,” said Gooding.
As an alternative, many entrepreneurs turn to banks, credit unions, or other financial institutions to take out personal loans. Most personal loans have repayment terms between two and five years and fixed monthly payments.
As long as the lender doesn’t have any restrictions on using a personal loan for business expenses, you can use the money for your company’s needs, such as purchasing inventory, buying office equipment, or launching a marketing campaign.
3 pros of using a personal loan for business expenses
A personal loan can be a useful tool for financing your business because of the following advantages.
1. It’s easier to qualify for a personal loan
With a new company, you’ll likely have trouble finding a business lender willing to work with you. Getting approved for a personal loan can be much easier because the lender looks at your credit history and income, not your business’s finances. You don’t need to provide extensive business plans or documentation like you would for a business loan.
Plus, the terms can be more favorable to you.
“If you have a strong personal credit score or significant equity in your home, the terms of the personal loan may actually be better than what your business could get on its own,” said Gooding.
Many personal loan lenders offer low interest rates — some as low as 4.99% — to borrowers with high credit scores and stable incomes.
2. Lenders disburse the funds quickly
If you plan to apply for a Small Business Administration (SBA) loan — one of the most common forms of business financing — the process can take weeks or even months.
In contrast, lenders often disburse personal loans in a matter of days. So, if you need funds quickly, a personal loan might be the best option to get the capital you need.
3. You don’t need collateral
Most business loan lenders require you to put down assets, such as your inventory, as collateral. If you fall behind on your payments, the lender can seize those assets.
Unlike business loans, most personal loans are unsecured and don’t require collateral. If you become delinquent on your loan, your credit can be damaged, but the lender can’t seize your assets.
3 cons of using a personal loan for business expenses
Although applying for a personal loan can be a smart decision, there are some drawbacks to consider.
1. You risk your personal credit
When you take out a personal loan for your startup, you put your own credit on the line. If your business fails or you fall behind on your payments, your credit score can plummet. A low score and a history of late payments can make it more difficult to get approved for other forms of credit.
Even if you make all your payments on time, a personal loan can hurt you in other ways. Taking out a loan raises your debt-to-income ratio, which can make it more difficult to qualify for a mortgage, car loan, or new credit card.
2. Lenders limit how much you can borrow
If you apply for an SBA loan, you can borrow as much as $5.5 million. Personal loans have much lower maximums. You might not be able to find a lender willing to loan you more than $100,000. If your business needs are extensive, a personal loan might be inadequate.
3. You could pay sky-high interest rates
Although personal loan lenders advertise low rates, they reserve those rates for applicants with excellent credit scores and high incomes. If your credit is less than stellar or you have a low salary, you might be stuck with a loan with an interest rate as high as 35.00%, which could cost you a significant amount of money.
If you took out a $25,000 personal loan and qualified for a five-year repayment term with a 5.00% interest rate, you’d repay a total of $28,307. In contrast, if you qualified for a $25,000 loan with a five-year term and a 35.00% interest rate, you’d pay a staggering $53,235. The amount you borrowed would more than double thanks to interest.
Use our personal loan calculator to find out how much you’d pay with different interest rates.
Applying for a personal loan
Although it’s not for everyone, using a personal loan for business expenses can be a smart way to grow your startup. To ensure you get the lowest rates and best terms, compare offers from multiple personal loan lenders.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||Rates (APR)||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
* Important Disclosures for Upgrade Bank
Upgrade Bank Disclosures
|7.73% - 29.99%||$1,000 - $50,000|
|5.83% - 14.74%1||$5,000 - $100,000|
|5.96% - 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% - 25.00%||$5,000 - $35,000|
|4.99% - 29.99%||$10,000 - $35,000||Visit FreedomPlus|
|4.99% - 16.24%2||$5,000 - $50,000||Visit Citizens|
|15.49% - 34.49%||$2,000 - $25,000||Visit LendingPoint|
|5.99% - 35.89%||$1,000 - $40,000||Visit LendingClub|
|5.49% - 18.24%||$5,000 - $75,000||Visit Earnest|
|9.95% - 35.99%||$2,000 - $35,000||Visit Avant|