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Personal Business Loans: Everything You Need to Know

Personal Business Loans: Everything You Need to Know
Susan Guillory
Susan GuilloryUpdated May 3, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Having enough funds to cover not only regular business expenses but also unforeseen ones can be a challenge for small business owners. And for some entrepreneurs, a traditional business loan may not be an option if they haven’t been in business long enough, don’t make enough in revenue, or don’t have good business credit.While you may be tempted to take out a personal loan to cover business expenses, there are definite downsides to this choice. Read on to learn more about the dangers of personal loans for business and when it might work out.

What is a Personal Business Loan?

A personal loan for business startups or business expenses is simply a personal loan that you qualify for the same way you would get a loan for any reason. It’s based on personal credit scores, income, and possibly assets. For personal loans in general, a personal credit score of 670 or above will probably give you the best options, but it can be possible to get a loan with a lower score.A personal loan may be taken out for any number of purposes, and most — but not all — personal loans don’t have requirements about what you can use them for. You could use the money to remodel your home, pay off credit cards, or fuel your business.Just as with many types of small business loans, when you take out a personal loan, you receive a lump sum upfront and then make monthly payments, including interest, on the amount you borrowed for a fixed number of months.Important: Not all lenders wish to make personal loans for business purposes. Check with any lender you’re considering before you apply to make sure there are no restrictions against business use because there are some lenders who don’t want this to happen.

Business Loans vs. Personal Loans

You may well be wondering what the difference between a business and personal loan is, given that either might be used for business expenses. Both essentially function the same way in that you apply for a loan, and, based on certain criteria, you’re either approved or denied. If approved, you receive the funds and start paying the lender back, with interest, over time.There are more similarities. Consider both types of loans from a tax perspective. With either a business or a personal loan, you may be able to deduct the interest on your taxes if you use the loan money strictly for business expenses. (Important: you can’t deduct interest for a business loan or a personal loan if you use the funds for personal expenses.) But there are differences. When considering you for a business loan, a potential lender may look at your business credit history and revenue, and the loan might be harder to secure if your business is just starting up. A personal loan application will likely want information about your personal credit and income and/or assets. What’s more, taking out a business loan (if you can) may help your business build its credit (the same goes for business credit cards and vendor lines of credit). Every time you pay your loan installment on time, that data is reported to business credit bureaus, which over time may build your business’s credit history and credit score.However, taking out a personal loan to start a business will not help your business credit in any way. Your loan repayments will be reported to the personal credit bureaus.Recommended: Does a Business Loan Affect Your Personal Credit Score?

Pros of Personal Loans for Business

There are other differences between the two types or loans which may make personal loans appealing to you.
  • Applying involves less documentation than business loans typically require.
  • Approval is usually faster than for a business loan.
  • You should be able to get your money in a lump sum, which is not always possible with a small business loan.

Cons of Personal Loans for Business

There are drawbacks to personal business loans.
  • You may not be able to borrow as much as you would with a conventional business loan.
  • It won’t help build your business credit.
  • If you default or are late with your payments, it can count against your personal credit, and, ultimately could lead to personal financial meltdown.
  • Not all lenders will issue personal loans for business purposes.
Recommended: Business Bank Account vs Personal Account

Where to Find a Personal Loan for Business

If you’ve decided to take out a personal loan to start a business or grow one, shop around for the best terms. A great place to begin is with a bank or credit union you already have a relationship with, but don’t limit yourself only to that option.And before you start looking at personal business loans, seriously consider a business loan instead. Unless you absolutely know you won’t qualify for one, it’s worth a little research to see what options you might be eligible for, since you may be able to build your business credit and realize tax savings. The Small Business Administration has several programs for entrepreneurs. Understanding SBA loans may seem complicated, but if you have questions, you can contact the SBA directly or your bank if it offers SBA loans.It’s also wise to compare small business loans to personal loans to see which offer you the best interest rates and terms. You might find a financing option you wouldn’t have otherwise been aware of.Recommended: What Is a Retail Lender? How Retail Loans Work

Alternatives to Personal Business Loans

Before you apply for a personal business loan, investigate your options. There are alternatives that could help you get the funds you’re seeking, even if you don’t have great credit. These include short-term business loans, merchant cash advances, and invoice factoring.Recommended: Hard Money Loans: What You Need to Know

When to Take Out a Personal Loan 

While there are several scenarios in which you might need an injection of cash, the best time to take out a personal loan for your business is before you need the money. That might seem counterintuitive, but it would give you the time you need to carefully research your financing options and take advantage of the best rates possible.In contrast, if you apply for financing that you need immediately, you may pay more for the convenience.A few scenarios when you might need extra capital include:
  • Operating during a slow season
  • Expanding operations
  • Purchasing larger orders of inventory
  • Capitalizing on business opportunity
Recommended: Startup Business Loans (Bad Credit, No Collateral)

How to Qualify for a Personal Loan

While lenders may have slightly different requirements when it comes to approving loan applicants, there are a few factors that are commonly considered.The first is your credit. Because this is a personal loan, it’s your personal credit score and history that lenders will look at. Most often, the better your credit score, the lower the interest rate and the better the terms you may qualify for.The next factor is your repayment history. Have you paid credit cards and installment loans on time, or have you had late payments or other delinquencies? This will determine how a potential lender views you as a risk or good investment.And finally, another key factor is your personal income. You may be asked to provide a few years’ worth of income tax documents or paycheck stubs to prove your income. Lenders want to feel confident in your ability to repay the loan with what you’re making. Before applying for a personal business loan, it’s a good idea to know how lenders will see you. Check your personal credit score to understand what type of loans you might qualify for.

Applying for a Personal Loan

Applying for a personal loan can be a fast and painless process once you’ve narrowed down your options to those you qualify for and that offer terms you are happy with. (Side note: if you’re curious about how to get a business loan, it’s a similar process, though you’ll provide more information, especially about your business).Streamline the application process by having several documents ready, including:
  • Recent pay stubs, W2s, and/or taxes returns
  • Government-issued photo ID
In the application process, you will be asked personal details like:
  • Social Security number
  • Date of birth
  • Contact information
  • Employment and income details
  • Gross monthly income
  • Mortgage or rent payment
You will also be asked what amount you would like to borrow.Once a lender has reviewed your application, you’ll be given an answer or asked to provide additional information. Lenders may vary in how quickly they deposit the loan funds, but some can deposit them as soon as the next business day.

The Takeaway

A personal loan for business purposes can provide a business owner with needed cash fairly quickly, but some lenders don’t want a personal loan to be used that way so check requirements. It could also prove financially risky because using a personal loan to pay for business expenses means that you’re putting your personal credit on the line if you default on the loan. And if you do make the payments on time, it won’t go toward building business credit.If you do want to proceed nonetheless, be sure to compare personal loans to find the best rate for your needs. The lowest interest rate may not actually be the best deal for you, especially if the loan needs to be paid back in a matter of months rather than years, which might mean a larger monthly payment you can’t afford.Consider all the factors that impact you: how much you’re eligible to borrow, how much you would pay in interest, what your monthly payment would be, whether there are fees, and how long you have to pay back the loan. If you already have a relationship with a bank, taking out a personal business loan there may make sense, but know that there are plenty of other online lenders who will compete to get your business.With Lantern by SoFi, users can be matched with a loan provider in an exclusive offer.

Frequently Asked Questions

How Do I Get a Personal Business Loan?
Can a Business Loan Be Used for Personal Use?
What is a Personal Business Loan?

About the Author

Susan Guillory

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.
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