Can You Get a Personal Loan To Start a Business and Is It Worth It?

ack of funding is a primary challenge for business owners and one of the main reasons small businesses fail, according to the Chamber of Commerce. Entrepreneurs may face barriers to acquiring funds like bad credit and limited cash flow that can exclude them from traditional financing options such as small business loans.

While business loans can offer a lower annual percentage rate (APR) and higher loan amounts, they aren’t the only financing option you can leverage to support your business. You can get a personal loan for business and use the funds to finance your business expenses. However, your lender’s terms and conditions must allow you to use the personal loan for business purposes. Then, with your personal loan, you may purchase inventory, use it as working capital, open a new branch, or use it for other commercial purposes that support your business.

What is a personal loan?

When you borrow money from a bank, online lender, credit union, or any other financial institution for personal use, it’s called a personal loan. Typically, borrowers take out personal loans to finance private affairs such as:

• Weddings
• Medical bills
• Home renovation projects
• Moving costs
• Emergency expenses
• And other large purchases like household appliances

Thanks to their flexible qualification standards, personal loans are easier to access than business loans. To approve personal loans, most lenders require:

• Proof of income, such as pay stubs
• A suitable credit score and income
• Collateral if applying for a secured personal loan
• Proof of identity and address
• Completed loan application forms (online or in-person)

These requirements are generally things you can furnish a lender with immediately. Conversely, business loan qualification requirements are more demanding and can take more time to gather. For example, lenders will require income tax returns, profit and loss statements, business licenses, and other requisite documents.

Most personal loans are unsecured, meaning lenders don’t ask you for collateral. If you default or fail to pay your loan, you’ll hurt your credit score, and other lenders will be reluctant to offer you a loan in the future. The lender may also engage a debt collector to recover payment from you through wage garnishment, a judgment lien, or other legal means. In the case of a secured personal loan, the lender will seize the asset you put up as collateral in the event of non-payment.

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Can I get a personal loan to start a business?

You can get and use a personal loan for business financing if your lender’s terms and conditions allow you to use the funds for commercial purposes. Most lenders don’t restrict borrowers from channeling a personal loan for business use, but some do. So, you must read and understand the lender’s loan usage rules before applying for a personal loan with which you intend to start a business.

If a lender doesn’t allow borrowers to use personal loans for commercial purposes, you’ll violate their loan usage terms if you use the loan funds to start a business. In that case, the lender may hike your loan interest rate, require you to pay the entire loan amount sooner, or reduce your loan period.

Being frank with a lender regarding your loan purpose is advisable so you both start on the same page. You should also compare interest rates from different lenders and prequalify to ensure you get the best market rates available.

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What are the different types of personal loans?

Financial institutions offer borrowers many types of personal loans that are structured differently for specific purposes. Some types of personal loans, like debt consolidation loans, may not help you start a business. Explore the personal loans you can use that can help you fund a new business.

Co-signed and joint personal loans

When you have bad credit, most lenders won’t approve your loan unless you have a co-signer who has good credit standing. Your co-signer may be a friend or family member with a good credit score who agrees to be liable for your loan repayments if you default. Your co-signer acts as a guarantor and doesn’t access the loan amount.

Joint personal loans involve two borrowers who have good credit. If you take a joint loan, you and your partner can access the loan funds and are liable for payments. Joint and co-signed loans are an excellent option when you don’t qualify for a personal loan alone or when starting a business with a partner.

Personal line of credit

A personal line of credit works like a credit card—lenders allow you to borrow money as you need to up to a maximum amount. This is instead of offering you one lump sum loan disbursement. With a personal line of credit, you only pay interest on the amount you borrow. Suppose you only need a small amount of capital initially for your business but figure you’ll need more funds in the future. In that case, you may consider a personal line of credit.

Fixed and variable rate loans

With a fixed-rate personal loan, you pay a fixed interest rate throughout the loan period. A variable-rate personal loan charges you fluctuating interest rates based on the going interest rates. Fixed-rate loans are ideal when borrowing large sums with a long repayment period. Variable-rate loans work best when you’re borrowing money for a short period.

Secured and unsecured personal loans

Secured loans need collateral, while unsecured loans are collateral-free. If you’re willing to risk assets like your property, car, or home, go for a secured personal loan. You’ll get lower interest rates and higher loan amounts since the lender has more security.

Unsecured personal loans charge a higher APR as lenders take on higher risks. Because of the low entry barrier, unsecured personal loans are among the most convenient funding sources for new businesses.  

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Is a personal loan for business worth it?

Before you apply for a personal loan, weigh the benefits and drawbacks and ensure it’ll serve your business needs effectively.

The top benefits of a personal business loan include:

• Fixed payments help you organize your business finances
• Easy qualification and fast funding so you can set up your business swiftly
• Lower APR rates compared to other funding solutions like credit cards
• You enjoy competitive interest rates if you have excellent personal credit

The drawbacks include:

• You pay higher interest rates if you have poor personal credit
• You risk your personal credit if your business fails to take off and you miss payments
• The maximum loan amounts may be insufficient to start a business (most lenders' maximum personal loan amount ranges from  $50,000 to $100,000)
• Repaying your personal business loan on time doesn’t help your business credit score

Getting a personal loan for starting a business can be worth it if:

• You can’t qualify for a business loan like a Small Business Administration (SBA) loan
• You can start your business with little money
• You need quick funding to capitalize on a business opportunity

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What are the alternatives?

Fortunately, other funding options beyond personal loans exist for starting a new business. These include:

• Self-funding
• Venture capital
• Crowdfunding
• Government grants
• Merchant cash advances
• Business loans (if you qualify)

Deciding the best financing option for your new business can be challenging. Comparing different lenders can be an uphill task, especially when you don’t know the options you qualify for and those you do. That’s why you need a solution like Novo Funding.

With Novo’s small business financing option, you can access up to $75,000 in instant working capitalif you qualify. Better yet, you can apply online for Novo Funding in under 10 minutes and get your approved funds in your Novo checking account to use as you please.

Apply for Novo’s small business funding today and get your business up and running.

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