Starting a business can take its toll on you financially. You’ve probably already done the planning and the paperwork, but how do you go about actually getting your products or services in front of the masses?
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. Between this requirement and minimum annual revenue eligibility, it can feel impossible to get funding for your startup.
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.
The short answer is yes, you can use a personal loan for your business needs.
While personal loans can generally be used for any legitimate reason, including financing a business, you should consider the conditions they 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.
Personal loans also rely on your credit score to determine what you will pay in interest and fees. You may have the option of a secured personal loan, but it’s less likely that you’ll need to provide collateral with a personal loan than with a business loan.
Compare personal loans you can use for business
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? 1 to 5 years, sometimes more.
What rates can I expect? 4% to 36%, depending on your personal credit score.
How fast can I get my money? Usually by the next business day.
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 score is good to excellent. Applying is fairly easy, although it will vary between providers. You can usually apply online, however if the lender has a physical branch location you can apply in person. Additionally, some lenders allow you to apply over the phone.
When applying for a personal loan, have the necessary information handy, including your personal 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 creditworthiness 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 when they are due.
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 costs than those offered to people who have good credit scores.
Pros and cons of using a personal loan for a small business
Pros
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 rating 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.
Cons
Lower limits. Business loans can have large maximums, up into the hundreds of thousands of dollars. Personal loan maximums are generally limited to around $35,000.
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 still have to pay back all of the loan.
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 will 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 on 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 business loans
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.
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.
Grants. Federal and private grants are available for many types of businesses and business owners, especially recent grads, entrepreneurs, women and minorities. Look into possible government grants and see if you are able to secure any additional funding.
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.
Bottom line
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. Before you apply for a loan, take the time to compare your loan 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 business loans as well as personal loans, since they may offer you options worth considering.
Qualifications vary by lender, but generally you will need to:
Be 18 years of age, or the age or majority in your province or territory
Have proof of an income
Be a Canadian citizen or a permanent resident with a valid Canadian address
Have a working 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 early repayment policy is. If you believe that you’ll be able to make early repayments, opt for a lender who won’t charge you any additional fees.
Aliyyah Camp is a publisher helping folks compare personal, student, car and business loans. Prior to joining Finder, she ran her own personal finance blog and wrote for numerous finance sites. Aliyyah earned a BA in communication from the University of Pennsylvania. She regularly attends industry conferences to stay in the know about market changes that can affect consumers. When she's not helping people with their personal finances, you can find her at the movies or going for a run outdoors.
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