Can You Use a Personal Loan for Your Small Business?
Getting into business for yourself can take its toll financially.
The startup costs of a small business, depending on the type of business you want to do, can range between $5,000 to $100,000 or more.
As a new business owner, you probably haven’t had the opportunity to build your business credit. Even if you apply for a business credit card or a business line of credit, you may receive only the minimum, which often ranges from $1,500 to $5,000.
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To begin the loan process for your business from any bank, private investor, or even the Government of Canada, the first step you must take is to build a business plan.
It’s a lot of work right off the bat, especially when you already have so many things on your mind. Because of this, using your personal loan for your small business becomes a go-to idea to help start and fund some of those startup costs.
With a personal loan, there is nothing stopping you from using it for business expenses. It is the quickest way to get started without having to apply again as a business, find investors who may take a portion of your business, or go through the government funding application process, which can be challenging when done on your own.
Don’t Have a Personal Loan Yet?
If you’re in business and need a loan to cover the expenses of starting up and growing your business, most lenders will want you to be operating for some time before providing funding. However, if you apply under your own name for a personal loan, the process is often much smoother.
This is especially true if you have a good credit history and can show the ability to repay the loan on time.
If you have a valid credit history, applying for a personal loan should not be difficult.
Using Your Personal Loan to Fund Your Small Business
Once you’ve obtained a personal loan, you can begin using it to fund your small business.
Keep in mind that when using your personal loan for business needs, there are certain things you need to understand.
For example, the loan is tied to your personal name, not your business name. This means that if something goes wrong with the business, you are still personally liable for repaying the loan.
A typical personal loan ranges between $10,000 to $50,000, depending on your needs and your credit score. These loans usually have terms of 1 to 5 years, with interest rates ranging from 5% to 25%, depending on the lender and your personal credit score.
One of the biggest advantages of personal loans is speed. In many cases, funds can be obtained within a few days.
How to Qualify for a Personal Loan
To secure a personal loan with lower interest rates and limited fees, you generally need a credit score of 650 or higher, which falls into the good to excellent range.
Applying for a personal loan is relatively simple, and in many cases, you can complete a pre-approval online, depending on the lender.
When applying, you will need to have certain information ready, including your personal details, financial information, and proof of income such as pay stubs or previous years’ tax statements.
A typical application usually takes about 15 minutes to complete.
Applying for a Personal Loan With Bad Credit
While good to excellent credit is preferred, some banks and private lenders may still offer personal loans to applicants with bad credit. These funds can still be used for your small business, but keep in mind that interest rates, loan amounts, and repayment terms may be less favorable.
As you repay your personal loan, make every effort to improve your credit rating. As your credit improves, follow up with your lender to see if your rates can be adjusted.
Actions such as paying down debt, making payments on time, and keeping accounts open to maintain a longer credit history all play a significant role in improving your credit score.
If you are unable to obtain a personal loan for your small business, consider government funding programs. These may offer guaranteed business loans, low-interest options, or even no-interest funding.
Pros and Cons of Using Personal Loans to Fund Your Small Business
The Pros
- Quick process. Personal loans often take far less time to process than business loans, with some being disbursed within one business day.
- Startup friendly. Because the loan is in your name, your business does not need to meet lender requirements.
- Low interest rates. Borrowers with good or excellent credit may qualify for lower rates compared to business loans for new companies.
- Reasonable repayment terms. Repayments are usually monthly instead of weekly or bi-weekly.
The Cons
- Lower limits. Business loans can reach much higher amounts, while personal loans are often capped around $35,000.
- Personal liability. You are personally responsible for repayment, even if the business fails or closes.
- Less support. Business loans may come with access to advisors and tools that personal loans typically do not include.
Other Types of Funding to Use for Your Small Business
If a personal loan is not an option, there are several alternative funding methods available:
- Borrowing from family and friends
- Using personal credit cards
- Finding a business partner with capital
- Partnering with private investors
- Using government funding such as grants, loans, and tax breaks
The bottom line is that using a personal loan to fund your small business can be a fast way to cover business expenses. While a strong credit score is often required, approved funds are usually available quickly. However, remember that you remain personally liable for the loan, and missed payments can negatively affect your credit. Since alternative funding options exist, it is always wise to explore multiple financing solutions, including government funding programs.