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Is It Safe to Use Personal Loan to Start a Business?

Should you use a personal loan to start a business? It’s difficult to launch a small firm.

They need a lot of time, patience, planning, and money that far exceeds what you may have assumed.

Fortunately, there are financial alternatives available to aspiring small company owners like personal loans.

In this post, we’ll look at the advantages and disadvantages of taking a personal loan to start a business, as well as how much money you may anticipate and when it’s appropriate to utilize one.

What is the best time to take out a Personal Loan to Start a Business?

So you have 2 excellent alternatives for funding your tiny business (A personal loan and a small business loan).

However, there are a few things to consider before making the decision of which loan type is best for you.

Keep in mind: Before accepting your personal loan application, some lenders may want to see certain business papers from you.

Before applying for a personal loan, you should be sure that the lender will not impose any restrictions on how the money may be utilized.

If the personal loan conditions are unclear, be straightforward about your intentions as a borrower and ensure that the lender comprehends that you may use the funds for your business.

If you already have a personal loan and wish to use it for business reasons, contact the lender.

It’s better to be clear about your goals from the start so you don’t break any loan rules.

It’s possible that if you use a loan for illegal reasons, the lender will demand that you return the entire sum plus interest right now.

Furthermore, if you don’t own any assets that may be utilized to secure a business loan, an unsecured personal loan might be an alternative.

A secured loan is one in which the lender may seize an item you put up as collateral if you don’t make payments.

Small business loans will usually demand that you put up security for the loan, whereas personal loans are typically unsecured.

You should also consider how much money you intend to borrow. The most common SBA loan size is $5 million. The most popular personal loan amount is $100,000.

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How Much Can a Personal Loan Be Used to Start Your Own Business?

Although the amounts of personal loans available to you and other lenders are similar, the terms may differ.

You may be able to get as little as a few hundred dollars up to $100,000 depending on where you look.

But it does not necessarily imply that you can borrow up to the maximum amount permitted.

Lenders will examine your credit report, revenue, and other obligations to determine how much they’re willing to lend you.

If your credit score is poor or you have a high debt-to-income ratio, for example, you may be limited in terms of how much you can borrow.

You can frequently discover what you qualify for during the risk-free period if you’re dealing with lenders that offer prequalification.

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Pros of taking out a personal loan to start a business

1. Easier to qualify

When applying for business loans, banks and other lenders look at your company’s revenue and time in operation, as well as your personal credit score.

Small-business lenders want to see some of your company’s pasts, especially if you’re a first-time business owner with a new firm.

So personal loans are easier to get than business loans if you’re just getting started with your endeavor.

2. Fast funding

After approval, Personal loans are funded most often in one week.

If you apply with an online lender, you should anticipate receiving money within the following business day or even the same hour.

Get The Loan ​Comparison Calculator

    It allows you to compare different loan scenarios. By taking 2 different loans, then manipulate it, extra payment per month, time to pay off, and more.

    After that it will show you the difference between accumulated interest, days between payoff dates, and things along those lines

    It may be a more appealing option than some business financing. The procedure of submitting an application for and receiving a conventional SBA loan, for example, might take 30 days to several months.

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    3. Flexibility

    You can typically use the funds from a personal loan however you want, whether it’s toward marketing, product development, office supplies, or another purpose.

    4. Low rates

    Personal loans have lower annual percentage rates (APR) than other forms of financing, such as credit cards, which means you may save money over the life of the loan.

    They also provide periodic payments that guarantee that your loan is repaid on schedule, so you won’t have to deal with compounding interest or interest on top of the original rate of interest.

    Underwriting criteria for unsecured personal loans are primarily based on your credit score and income.

    This means that you may add in other income streams, such as your job or rental property, to help supplement the initial trickle of cash from your new business.

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    Cons of taking out a personal loan to start a company

    1. A personal loan interest payment may not be tax-deductible

    unlike business loan interest payments. However, there is an exception when you use a personal loan to cover company costs. To receive the entire deduction, make sure no part of the loan is used for any other purpose.

    2. Your personal funds or assets might be at risk

    If you take out an unsecured personal loan and don’t repay it, your credit score may suffer. This will make it more difficult for you to get funding in the future.

    The lender may seize your assets if you default on a secured personal loan, which is connected to your personal property.

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    3. Small loan size

    Business loans are often larger than personal loans, which typically range from $1,000 to $50,000.

    The size may be perfect for a small business, but if you operate an established company or want to purchase big-ticket items, you’ll need loans with greater financial resources.

    4. Shorter repayment terms

    The majority of personal loan terms are between 1 and 7 years long.

    If you need a longer repayment term, there are other small-business financing alternatives that would be more appropriate for your needs.

    The SBA loans have the longest repayment periods, ranging from 5 to 25 years.

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    When might a small business loan be appropriate?

    The amount you can borrow for each loan is an important consideration.

    If you believe you’ll require more than $100,000 to get started, an SBA loan might be a good option.

    Creating a business plan and budget can help you figure out exactly what your demands are.

    It’s also important to remember that personal loans are based on your credit history.

    Remember, If you aren’t paying your bills on time, your personal credit score can suffer, making it more difficult to obtain other sorts of financing – like a new credit card, auto loan, or house mortgage.

    Frequently Asked Questions

    Is it good to take a personal loan to start a business?

    Borrowed money may be used to cover the initial investment in a new business. According to US data, borrowing money is one of the most popular sources of financing for small firms.

    Borrowed money eliminates business owners’ personal financial risks when they start a new endeavor.

    How big of a loan can I get to start a business?

    Personal loans come in all shapes and sizes, with varying interest rates and loan amounts based on a number of criteria, including by lender. In certain parts of the country, you may be able to obtain as little as $100 to $10,000.