You can use a personal loan to fund your business, but the question is: should you? Here are some common reasons you might use a personal loan for business:
You don’t yet own a business:
- If you are in the beginning stages of your business. And haven’t yet opened your doors or started generating revenue. You are unlikely to be able to find a business loan. Instead, a personal loan can help you finance startup costs and get your business off the ground.
You don’t have the time in business or revenue to qualify for business financing:
- If you are already open for business but don’t qualify for financing due to the age of your business or low revenue. You can use a loan to keep things operating while you overcome early-business obstacles.
Your business is in a risky industry (such as food service):
- Businesses in risky or undesirable industries often have trouble getting a business loan. Because lenders are afraid, they will not get their money back. Instead, you might find it easier to get a loan that is tied to your personal creditworthiness, not the creditworthiness of your business.
A personal loan is less expensive:
- You might qualify for a custom loan with low rates and fees if you have strong personal credit and a low debt-to-income ratio. This could be a better option than a business loan. If your business creditworthiness is not nearly as good as your personal creditworthiness.
These are all good reasons for considering a personal loan for business. However, there are also situations where another financial product would be more suitable for your business. Those scenarios?
Your business needs a lot of capital:
- If your financial needs exceed $100,000, a personal loan may not be sufficient to cover those needs. Personal loans have lower maximum borrowing than business loans and other financing options. If you have higher capital needs, consider applying for an SBA 7a Loan, which has limited to up to $5 million.
You’re applying for a mortgage, car loan, or another personal financing in the near future:
- Taking a personal loan for a business raises your debt-to-income ratio, making it more difficult (or even impossible) to qualify for additional financing until you pay down your debt. If a personal mortgage, vehicle loan, or other financing is in your future, you may want to reconsider adding to your debt with a loan used for your business. It is also important to remember that making a late payment, missing payments, or defaulting on the loan will impact your personal credit score, so make sure to make all payments as scheduled.
A final warning before you go down the personal-loan-for-business path: It’s okay to mix personal and business finances initially, but at some point, you’re going to want to separate the two. Even if the funds are technically from a personal loan, I would advise those that can set up a business bank account and exclusively use the loan money for business purposes. This will simplify your taxes and accounting processes.
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