What you should know before borrowing to expand your side gig.
Growing a business takes some cash upfront — even if it’s freelance work — and a personal loan can help you cover the initial costs. But it can be a gamble, since you’ll be on the hook to pay back that cash if your business isn’t as successful as you’d predicted. We break down when taking out a personal loan for your side hustle can help and when you might want to hold off.
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Is it a good idea to take out a loan for my side hustle?
It depends on factors like your overall personal finances, what you plan on using your loan for and where you think your business is heading financially. If you’ve got good credit, few personal debts and a steady income, you’ll likely to be able to qualify for a personal loan with a competitive rate. If not, you could have trouble getting approved for the amount you need.
Haven’t made a business plan with financial projections yet? Do that before you look into your financing options. It’ll give you a better idea of where you’ll be heading financially and how much debt your business can realistically afford to take on.
It’s also a good idea to have a specific plan for what you’ll use your funds for. You may want to consider looking into other types of financing, like a personal line of credit if you expect to need funds for ongoing expenses like renovations or purchasing inventory while you’re building up your revenue.
When it’s likely a smart idea
- You have good credit of 670 or higher.
- You don’t have much personal debt.
- Your financial projections show a loan can help.
- You know exactly how to use your funds.
When it may be a bad idea
- You have fair or poor credit lower than 670.
- You’re already in a lot of debt.
- You haven’t made a business plan yet.
- Financial projections show your side hustle won’t be able to afford repayments.
How to get a low-interest personal loan for a side hustle
Fees are less common on personal loans than business loans, so interest is likely to be your main cost. Interest is a percentage of your loan amount that you pay each month on top of repaying the money you borrow. Lower interest rates translate into lower loan costs.
To qualify for a low-interest loan, you’ll typically need to have:
- Good credit. Generally you need a credit score of at least 670 to qualify for a competitive rate. The lowest rates usually go to borrowers with credit scores above 740, however.
- Regular income. Most lenders require you to have a steady job and make a minimum yearly salary to qualify for a personal loan — usually around $25,000. You might also have trouble qualifying if you’re currently self-employed.
- A low debt-to-income (DTI) ratio. Instead of just looking at your income, some lenders consider your monthly debt payments in relation to your monthly income when determining your interest rate. Generally, lower rates go to to borrowers with lower DTIs.
Consider paying off some of your debts to increase your credit score and lower your DTI before you apply so you can qualify for more competitive rates.
You also might want to prequalify with multiple lenders to learn which can give you the lowest interest rate. Most online lenders let you prequalify by filling out a quick form on their site and can give you an estimate of what your rates might be in a matter of minutes. Prequalification usually only involves a soft credit check, so your credit score won’t be impacted if you preapply with multiple lenders.
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5 tips to help your side hustle succeed with a personal loan
Putting money into your side gig is sometimes exactly what it needs to grow into a full-time job — or even just become more profitable. For example, forking funds into something like research and development can help you develop a better product that customers are more likely to buy and pay more for.
Here are some tips to make the most of a personal loan for your side hustle:
- Invest in research. Hunches can be a great starting point, but sometimes research into your customers’ likes and dislikes can prove you wrong. Spending time and money on researching any part of your business that the customer interacts with can improve satisfaction and bring more people in.
- Pay for marketing. Don’t know how to brand yourself or reach your customer base? Hiring a marketing firm to help you come up with a plan can more than pay for itself by bringing in more customers and increasing your reach.
- Hire a designer. Ever choose a brand simply because you liked the way it looked? At the end of the day, packaging and graphic design play a larger role than a lot of people care to admit. Investing in visuals not only makes your product and site more appealing — it can also make it feel more trustworthy.
- Invest in efficiency. Whether it’s an expensive software that can cut the time it takes to do a task in half or equipment that improves the output and quality of your product, investing in efficiency can cut down on overhead costs.
- Bring on more hands. Extra staff can make your side hustle more productive and therefore more profitable. Plus, you might have an easier time qualifying for a business loan down the line — lenders aren’t always willing to work with sole proprietorships.
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Bottom line
A personal loan could be the boost your side hustle needs when you’re ready to take it to the next level. But it isn’t right for every business. You’re still on the hook for paying that money back even if your business fails, which can be difficult if you’ve lost your source of income. Researching lenders, coming up with a plan for your business and knowing exactly how your side gig could use the funds are key to making the most of a personal loan.
Think a personal loan might be a good idea? Get started by visiting our personal loans page, where you can learn more about how they work and compare lenders.
