How To Get A Personal Loan To Start A Business

Getting a personal loan to start a business can be an effective way to get financing without a business history.

Even if you have a steady income and a high personal credit score, additional requirements such as time in business or a business credit score make it a tough task to get access to the best business loans. This can be a problem, particularly for startups. Using a personal loan for business allows you to bypass some of these restrictions to get financing for your business.

Why Use A Personal Loan To Start A Business?

Many personal loans can be used for business expenses. Business loans typically require at least 6 months of business history, with many banks and conservative lenders requiring as long as two years. Unlike business loans, personal loans do not have a “time in business” requirement.

Instead, a personal loan tends to emphasize personal creditworthiness.

Personal Loans For Business VS Business Loans

In structure, personal and business loans are very similar. Most loans are installment loans, which means you’ll receive the money as a single sum and repay it in fixed, periodic installments. However, there are a few differences that might affect which type of loan is better for your business.

Borrowing Amounts

While businesses can borrow millions of dollars in loans (if they have the means to pay it back), personal loans are typically for much smaller amounts. Most personal lenders won’t lend over a maximum of $40,000 or $50,000. Naturally, the amount you’re offered will depend on your ability to repay the loan. To decide how much you can safely borrow, the underwriter will look at information such as your income and debts to determine how much supplemental money you have to make loan payments.

Credit Check

Personal loans, as you might expect, tend to be very concerned with your personal creditworthiness. This is also often true of business loans, but some lenders and loan types are more concerned with things like cash flow, credit card sales, or unpaid invoices.

Personal loans for business work best for borrowers with good credit, as they’ll be able to borrow more, borrow more easily, and borrow at a better interest rate.

Minimum Time In Business

Business lenders generally want to see that you can keep your venture going before they extend you credit. Lenders offering the best interest rates will want to see at least two years of business history. Even most alternative lenders want to see at least three months.

Personal loans, on the other hand, have no business-related requirements.

Can Be Used For Business Expenses

Many personal loans can be used for business expenses, but you’ll want to check with your lender to make sure you don’t violate any of their policies.

While business loans are, obviously, used for business expenses, some types of financing can have restrictions on how those funds can be spent. Equipment financing, for example, can only be used to acquire hard assets.

Collateral Needs & Liability

The majority of personal loans are unsecured. For comparison’s sake, business loans might require you to put up collateral or sign a personal guarantee. Unsecured loans are considered higher risk than loans secured by specific collateral, which means that they typically carry higher interest rates and fees to account for the additional risk. That said, it is possible to find secured personal loans if you have something you’re willing and able to use as collateral.

How To Get A Personal Loan To Start A Business

If you are interested in getting an affordable personal loan, you’ll need to be a creditworthy borrower with a good debt-to-income ratio. If you have a credit score over 600 and a debt-to-income ratio of 46% or lower, you will have a fairly good chance of qualifying for a personal loan.

You can look up your score on one of the best free credit score sites. Don’t meet those standards? Check out our feature on personal credit scores explained. We can also help you get a sense of how long it takes to improve your credit score. It helps if you know how to calculate and lower your DTI.

What Documents Do You Need To Get  A Personal Loan For Business

If you do meet those requirements, you have a good chance of qualifying for a personal loan. When you apply for a loan, your lender requires personal information, including your full legal name, Social Security number, and contact information. You will also need to prove your income and creditworthiness by providing documentation, including:

• Personal Income Tax Returns
• Personal Credit Score & Report
• Bank Statements

How To Use A Personal Loan For Business

Assuming that your lender doesn’t have any restrictions on using a personal loan to start a business, you can use a personal loan for just about any business expense.

Whether you own an established business or your company is just an idea that hasn’t yet come to fruition, there are many ways that you can use a personal loan to fund business expenses.

When To Use A Personal Loan For Your Business & When To Avoid It

You can use a personal loan to fund your business, but the question is: should you? There are circumstances where personal loans for business use make the most sense and others where another financial product is advisable.

Use A Personal Loan For Business If…

Don’t Use Personal Loans For Business If…

These are all good reasons for considering a personal loan for business. However, there are also situations where another financial product would be a more suitable choice for your business.

Next Steps: Where To Find Personal Loans For Your Business

Once you’re ready to apply for a personal loan for business, it’s time to find the most affordable personal loan with terms that work best for your financial situation. You can get started with our picks for best personal loans for small business.

Looking for alternatives to personal loans for business? Check out our picks for best small business grants.