6 Things to Keep in Mind Before Using a Personal Loan for Your Startup

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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.

How personal loan interest rates affect your total repayment

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?

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Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

RATES (APR)loan amount
5.99% – 17.88%1 $5,000 to $100,000
5.69% – 35.99% $1,000 to $50,000
6.98% – 35.89%* $1,000 to $50,000
5.99% – 24.99%3 $5,000 to $35,000
5.99% – 29.99%4 $7,500 to $40,000
15.49% – 35.99% $2,000 to $25,000
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1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Fixed rates from 5.99% APR to 17.88% APR (with AutoPay). Variable rates from 6.49% APR to 14.70% APR (with AutoPay). SoFi rate ranges are current as of November 4, 2019 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 6.49% APR assumes current 1-month LIBOR rate of 1.81% plus 3.08% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.
  2. To check the rates and terms you qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull.
    See Consumer Licenses.
  3. Minimum Credit Score: Not all applicants who meet SoFi’s minimum credit score requirements are approved for a personal loan. In addition to meeting SoFi’s minimum eligibility criteria, applicants must also meet other credit and underwriting requirements to qualify.
  4. If you lose your job through no fault of your own, you may apply for Unemployment Protection. SoFi will suspend your monthly SoFi loan payments and provide job placement assistance during your forbearance period. Interest will continue to accrue and will be added to your principal balance at the end of each forbearance period, to the extent permitted by applicable law. Benefits are offered in three month increments, and capped at 12 months, in aggregate, over the life of the loan. To be eligible for this assistance you must provide proof that you have applied for and are eligible for unemployment compensation, and you must actively work with our Career Advisory Group to look for new employment. If the loan is co-signed the unemployment protection applies where both the borrower and cosigner lose their job and meet conditions.
  5. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
2 Includes AutoPay discount. Important Disclosures for Payoff.

Payoff Disclosures

  1. All loans are subject to credit review and approval. Your actual rate depends upon credit score, loan amount, loan term, credit usage and history. Currently loans are not offered in: MA, MS, NE, NV, OH, and WV.
3 Important Disclosures for FreedomPlus.

FreedomPlus Disclosures

  1. All loans available through FreedomPlus.com are made by Cross River Bank, a New Jersey State Chartered Commercial Bank, Member FDIC, Equal Housing Lender. All loan and rate terms are subject to eligibility restrictions, application review, credit score, loan amount, loan term, lender approval, and credit usage and history. Eligibility for a loan is not guaranteed. Loans are not available to residents of all states – please call a FreedomPlus representative for further details. The following limitations, in addition to others, shall apply: FreedomPlus does not arrange loans in: (i) Arizona under $10,500; (ii) Massachusetts under $6,500, (iii) Ohio under $5,500, and (iv) Georgia under $3,500. Repayment periods range from 24 to 60 months. The range of APRs on loans made available through FreedomPlus is 5.99% to a maximum of 29.99%. APR. The APR calculation includes all applicable fees, including the loan origination fee. For Example, a four year $20,000 loan with an interest rate of 15.49% and corresponding APR of 18.34% would have an estimated monthly payment of $561.60 and a total cost payable of $7,948.13. To qualify for a 5.99% APR loan, a borrower will need excellent credit on a loan for an amount less than $12,000.00, and with a term equal to 24 months. Adding a co-borrower with sufficient income; using at least eighty-five percent (85%) of the loan proceeds to directly pay off qualifying existing debt; or showing proof of sufficient retirement savings, could help you also qualify for the lowest rate available.
* Important Disclosures for Upgrade Bank.

Upgrade Bank Disclosures

* Personal loans made through Upgrade feature APRs of 6.98%-35.89%. All personal loans have a 1.5% to 6% origination fee, which is deducted from the loan proceeds. Lowest rates require Autopay and paying off a portion of existing debt directly. For example, if you receive a $10,000 loan with a 36-month term and a 17.98% APR (which includes a 14.32% yearly interest rate and a 5% one-time origination fee), you would receive $9,500 in your account and would have a required monthly payment of $343.33. Over the life of the loan, your payments would total $12,359.97. The APR on your loan may be higher or lower and your loan offers may not have multiple term lengths available. Actual rate depends on credit score, credit usage history, loan term, and other factors. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. There is no fee or penalty for repaying a loan early. Personal loans issued by WebBank, Member FDIC.

** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.

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