To be eligible for a business loan, you’re usually required to be in business for a specified period of time – whether it’s one or two years – as well as meet any minimum revenue requirements. Between these two requirements alone, it can feel impossible to get funding for your small business.
That’s where personal loans come in. These types of loans are taken out by you as an individual, which means the finances of your business are not a concern. Instead, your ability to repay your loan and your creditworthiness are what lenders take into account.
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Yes, you can use a personal loan for your business needs. Personal loans can typically be used for any legitimate reason, including financing a business.
However, you should consider the conditions a personal loan could come with. The biggest one is that your name – not your business’ name – is attached to the loan. This means as an individual, you are liable for the loan and will have to pay it back in full, whether that’s from your personal bank account or your business account. Personal loans also rely on your personal credit score to determine the loan terms and interest rates that you’re eligible for.
Quick facts about personal loans for business
How much can I borrow? Up to $35,000, sometimes higher.
How long is a typical loan term? 6 months to 5 years, sometimes longer.
What rates can I expect? 4.5% to 36%, depending on your personal credit score and the lender.
How fast can I get my money? Usually by the next business day.
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What do I need to qualify?
To get the most competitive personal loan, you’ll generally need to have a credit score of 650 or higher, which usually means your credit rating is good to excellent. Applying is fairly easy, although it will vary between providers. You can usually apply online, over the phone or in-person if the lender has physical branch locations.
When applying for a personal loan, have the necessary information handy, including your personal information, employment information and financial details. Depending on the lender, your application could take as little as five minutes to complete.
What if I have bad credit?
Just one small hiccup and your credit score can take a tumble. Luckily, there are ways to improve your credit score over time.
You can improve your credit score by doing things like:
Paying down your debt or open balances.
Making payments on time and in full.
Keeping accounts open, even if you don’t use them, to increase your account history length.
However, you may not have time to raise your credit score. If you find yourself in this situation, you could consider applying for a bad credit personal loan. Bad credit personal loans should be considered carefully, as they tend to carry much higher interest rates and fees, as well as poorer terms, than those offered to people who have good credit scores.
Are personal loans used for business expenses tax-deductible?
No, since you’re using a personal loan, the interest is not tax deductible. Interest paid on personal loans is not tax deductible in Canada, since you’re using the funds for personal purposes.
Interest paid on loans is usually only tax deductible if it’s used for generating income (and it meets the CRA’s eligibility requirements). So if you took out a business loan to fund your small business expenses, you’d be able to deduct the interest from your business income. All interest that your business pays to finance its operations is usually tax deductible.
So, is it a better idea to take out a business loan?
Since you’re able to deduct interest from your business income on your taxes, you will potentially save some money by choosing a business loan instead of a personal loan. That said, you’ll want to compare whether you’re actually eligible for a business loan – since the eligibility requirements can be harder to meet than a personal loan – and you’ll want to make sure you can get favourable interest rates and terms.
Compare both business and personal loan lenders to see which offers a lower APR and more competitive loan terms. You’ll then be well placed to make an informed decision that will save you money and provide you with the financing you need.
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Pros and cons of using a personal loan for a small business
Quick process. It often takes much longer to complete the process for a business loan, whereas some personal loans can be disbursed within just one business day.
Startup friendly. Since you’re personally taking on responsibility for the loan, your business doesn’t need to meet any requirements.
Low interest rates. A good or excellent credit score of 650 or higher, can usually get you lower interest rates for personal loans. A business loan could be more costly if your business credit isn’t as healthy.
Reasonable repayment terms. With a personal loan, repayments are likely to be monthly, instead of weekly or bi-weekly.
Personal liability. You are liable as an individual to repay your loan in a timely manner. If your business doesn’t become profitable or you decide to close the business, you’ll still have to pay back the loan in full.
Less support. With many lenders, getting a business loan also means gaining access to tools and experts to help you grow your business. You likely won’t get this same business support with a personal loan.
4 tips to get the most out of a personal loan
Consider efficiency. Think about how each purchase you make with your loan will save you time and money, either in the long term or the short term. Remember that you’ll want to be efficient with both your time and your money.
Go secondhand when you can. Some business machines are built to last and don’t need more than a few repairs to keep running for decades. Some might even last longer than newer versions – a lot of new equipment is designed to become obsolete in a few years. Purchase secondhand if you can.
Stock up with wholesalers. More inventory means more potential sales. Use your personal loan to take advantage of wholesaler deals to save on costs.
Make an investment in marketing. Now that you have the goods, you need the customers. Investing in a marketing plan by hiring a consultant – or even doing it yourself – can more than pay for itself.
Alternatives to using a loan
Investors. Angel investors and venture capital investors can provide financing in exchange for a portion of your business. However, this type of funding carries its own risks and rewards – including giving up a portion of your business.
Credit cards. Personal and business credit cards could be a means of getting the financing you need. Plastic can be especially useful if you’re looking to make a big purchase. However, it can also be risky since you don’t physically have to hand over the money, and you may only realize what you’ve spent when you see the balance on the card statement.
Bootstrapping. Financing may not be necessary if you’re in a position where you can save up the money you need and fund your business with cash as it grows.
There are definite benefits to personal loans for business use, depending on your situation. Startups and business owners who only need a few thousand dollars of funding may find a personal loan better suited since they’re easier to apply for and provide fast funding. But business loans can help you build your business credit and the interest paid is tax deductible through your business income.
Before you apply for a loan, take the time to compare your options in order to find the best loan for your needs.
Frequently asked questions
No, you don’t need a business plan in order to get a personal loan for business use. Personal loans rely on your personal finances and qualifications, not those of your business. Your credit score and your ability to repay your debt will play important roles in the approval of your loan.
Yes. In fact, as a sole proprietor, you might find it easier to get personal loan than a business loan since your business has no separate existence from you as an individual.
However, you should still look into small business loans as well as personal loans, since they may offer you options worth considering.
Qualifications vary by lender, but generally you’ll need to:
Be 18 years of age, or the age or majority in your province or territory
Show proof of income
Be a Canadian citizen or a permanent resident with a valid Canadian address
Have an active bank account
You may be able to make early repayments at no additional cost, depending on the lender. Before you sign a loan contract, inquire with the provider about what their prepayment policy is. If you believe that you’ll be able to make early repayments, opt for a lender that won’t charge you any additional fees.
Emma Balmforth is a producer at Finder. She is passionate about helping people make financial decisions that will benefit them now and in the future. She has written for a variety of publications including World Nomads, Trek Effect and Uncharted. Emma has a degree in Business and Psychology from the University of Waterloo. She enjoys backpacking, reading and taking long hikes and road trips with her adventurous dog.
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