How to Get a Personal Loan for Business
Your new business doesn't have a credit history but you do.
When business owners can’t qualify for business loans, they often turn to other funding sources such as personal loans.
Personal loan amounts can range from $1000-$100,000. Interest rates may be as low as 4% or as high as 35%. You can often get approved quickly, especially when applying through online lenders.
Advantages of Using a Personal Loan for Business
There are several advantages to using a personal loan to fund a small business.
Available to Startups
It can be challenging to find a small business loan for a business that is less than two years old and doesn’t have significant revenue. With this type of loan, however, information about your business is not required, so a startup may qualify.
A personal loan is often structured as a “term loan,” which means you borrow a fixed amount of money for a fixed period of time. Unlike a credit card or line of credit, where the monthly payment will vary depending on the balance, you’ll know exactly how much you need to pay each month to repay the loan within a specific time period. Most offer 3-5 year repayment terms, though some lenders offer loans with longer repayment periods).
Business Credit Not Required
There will be no business credit check, so there is no need for the business to have a good business credit score.
No Need to Incorporate
There are 23 million businesses that operate as sole proprietorships. Since there is no legal structure to separate the business owner from the business, these owners often must rely on personal credit to fund their ventures.
Disadvantages of Using a Personal Loan for Business
As helpful as they can be, there are some distinct disadvantages to using a personal loan for business.
Require Personal Credit Checks
The decision to extend credit will very likely include a review of your personal credit score from one of the major credit bureaus. An inquiry will appear on the credit report that was checked and that inquiry may lower your credit score by a few points. Note that some personal loan lenders will use a “soft” credit check, which does not impact your credit scores.
Require Personal Guarantees
Because these loans are made to the individual and not to a business, you will automatically provide a personal guarantee. Essentially, you are agreeing to pay back the loan even if your business fails.
Impact Personal Credit Scores
These loans will generally appear on your personal credit reports and may impact your personal credit scores, even when paid on time.
How to Shop for a Personal Loan for Business
Some banks and credit unions offer personal loans, but some may simply direct applicants to apply for a credit card instead. In addition, a variety of online lenders offer personal loans, and even some credit card issuers offer personal loan products. For convenience, it often makes sense to search online for a personal loan.
Before you apply, review your credit reports from all three major consumer reporting agencies—Equifax, Experian and TransUnion—to make sure your credit reports are accurate. While the credit score a lender obtains from a credit bureau may be somewhat different from the score you see as a consumer, you should at least get an idea of whether or not your credit is strong. Checking your own credit will not have an impact on your scores.
Make sure you understand the cost of a personal loan, including:
- APR: In addition to the interest rate, you’ll see an Annual Percentage Rate (APR) which takes into account other costs such as origination fees.
- Fees: Lenders may charge origination fees, annual fees, or penalty fees for infractions such as late payments.
Watch out for online lenders that require you to wire fees to an individual before the loan has been made. The Federal Trade Commission warns consumers about personal loan scams that often prey on borrowers who have trouble getting financing due to low credit scores.
Applying For a Personal Loan
You will typically need to provide your Social Security number so the lender can pull your credit score from one of the major consumer credit reporting agencies. Many will use a credit score to help determine the interest rate you’ll pay. Some lenders disclose minimum credit score requirements, but many do not. Some will issue loans to consumers with relatively low credit scores (in the low 600s) while others may require higher scores.
In addition, the lender will ask questions about income and employment to determine whether you have the financial capacity to repay the personal loan. Income requirements vary, and most lenders do not reveal the minimum annual income required to qualify. Lenders may use other information to help you qualify such as education or employment history.
Using a Personal Loan for Business
If your application is approved, funds will be deposited into your bank account, and you may use them in any way you choose. Starting and running a business is risky, so be careful how you spend that money.
If you don’t have a savings account for your business, consider setting aside some of the funds you receive as a cushion in the event cash flow is tight. A good rule of thumb is to keep the equivalent of 3-6 months’ worth of payments on hand at all times in case of emergency.
Repaying your personal loan on time is crucial to avoid late payments, which can affect your personal credit and make it more difficult to get financing in the future.
Center for Financial Services Innovation: 2016 Financially Underserved Market Size Study