Can You Use a Personal Loan for Business?
Summary
Wondering if you can use a personal loan to start a business? Learn whether you can use personal loans for business, some pros and cons of doing so— and a few alternative options to get the funding you need.
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Whether you’ve spent years dreaming of starting your own business or you’ve only recently discovered your calling as an entrepreneur, kickstarting a business of your own is an exciting venture. Starting a business requires a lot of planning, creativity and, most importantly, money for expenses like equipment, real estate, inventory, marketing and supplies.
If you’ve done some research to find funding, you might be wondering if you can use a personal loan for business expenses. The short answer is maybe, but it depends on the lender. Many lenders restrict the ways you can use a personal loan to prevent borrowers from using funds for most business expenses. But that doesn’t necessarily mean a personal loan can’t help you as you prepare to start a business.
As you begin to build your business, you may have to dip into your own savings or investments. Even if a personal loan can’t cover your startup costs, you may be able to use one to help you make ends meet as your business comes together.
Let’s explore the pros and cons of using a personal loan as a new business owner, the process of getting a personal loan and potential alternative financing options you might want to consider.
Can you use a personal loan to start a business?
You may use a personal loan to help with some expenses when you launch a business, but it’s not always the best idea. A personal loan can be a quick, accessible way to secure funds. Unlike business loans, personal loans don’t require you to have an established business credit history or to provide business-related documents like a business plan.1 This makes personal loans a popular choice for new entrepreneurs.
Many lenders, including OneMain Financial, don’t allow borrowers to use a personal loan for business purposes.2 In that case, you may want to think about other ways to use the funds that may support your business goals.
As a new business owner, you may end up spending a lot of your own money getting your company off the ground. Personal loans may help you bridge any gaps that you create by spending your income or savings on business costs. If you have to dip into your vacation savings to fund your business, for example, you may use a personal vacation loan instead of missing the trip.
If you’re unsure whether your intended use for a personal loan would violate the lender’s usage rules, you can let the lender know how you intend to use the funds. Being transparent allows the lender determine your eligibility and, if approved, the loan amount, repayment term and interest rate (the cost of borrowing).3 It’s important to do your research or simply reach out to the lender directly if you have any questions. They’ll be able to help you find the loan that best fits your needs, depending on what you’re eligible for.
Pros and cons of using a personal loan for new business owners
A personal loan may offer some financial cushion as you start a business. But before you take the plunge, weigh the benefits and potential drawbacks to make sure it’s the right financial move for you.
Pros
Easy to apply
In addition to proof of income, credit history and identification, business loans often require further documentation like a business plan, articles of incorporation and proof of revenue. If you’re using a personal loan to supplement your personal budget while you work on launching your business, you may only need to provide proof of identity, proof of residence and proof of income. If you’re using a personal loan for business purposes, some lenders may ask for additional details about your business or how you plan to use the funds, but may not require specific documentation for a business you haven’t started yet.
Quick approval process
Personal loans often have a faster approval process than business loans and other forms of financing. You may be able to apply online and receive funds within a few days.4
No need for business credit
Some people choose personal loans to cover certain business expenses, because they haven’t yet established the business credit score necessary to qualify for some business loans. Instead of reviewing business credit for a personal loan, lenders look at your personal financial profile, including your credit score, credit history, income and overall financial stability, to determine your eligibility. Making sure your credit score and finances are in good shape could help improve your chances of approval.
Flexibility
When you receive the payout from a personal loan, you have the flexibility to use the funds however you’d like to, within the lender’s loan usage guidelines. If your lender allows the use of personal loans for business expenses, you may have the freedom to use the funds as needed. If you can’t use the loan for business expenses, you still have the flexibility to apply funds to personal costs.
Cons
Potential impact on personal credit
Since a personal loan is in your name rather than a business’s, any late payments or defaults might negatively impact your personal credit score. If you’re using a personal loan to cover or offset business expenses but the business doesn’t take off, you’re personally on the hook for the debt. If you fail to repay the loan, it may make it harder to get approved for another loan or line of credit in the future — even one unrelated to your business.6
Does not build business credit
Using a personal loan does not help you build your business credit profile, which is important for future financing and vendor relationships.
Limited borrowing amounts
Personal loans typically offer smaller borrowing amounts than business loans, usually up to $100,000, depending on the lender. quickly. If you need to borrow a larger amount, a personal loan may not cover it.7 Whether you use a loan or pay out of pocket, business expenses often add up quickly. If you need to borrow a larger amount, a personal loan may not cover it.
Shorter repayment terms than business loans
Personal loans typically have repayment terms of 1 to 7 years, while business loans offer a wider range of repayment terms that can vary from a few months to 25 years but are priced accordingly.8 A shorter repayment period may result in higher monthly payments, which could put a strain on your finances — especially if you’re just starting your business. Before choosing a loan, consider how the repayment timeline fits into your budget and long-term financial goals for your business and yourself.
Loan use restrictions
Some lenders, like OneMain, do not allow personal loans to be used for business expenses. However, we do offer personal loans that can be used to help you manage personal expenses while you focus on your business — such as household bills, debt consolidation or unexpected costs. Checking with your lender about loan use restrictions if you’re planning to use the proceeds for a business.
When might a personal loan make sense if you’re starting a business?
While you may not be able to use a personal loan for many business expenses, it may be an option in some circumstances.
A personal loan might work for a smaller expense, especially if you need the money quickly — as long as it aligns with your lender’s usage rules. So, a personal loan likely wouldn’t be the right fit for your first month’s operational costs. But if you need a new laptop to keep up with new business responsibilities, a personal loan could help.
Alternatively, maybe you’re a contractor and use your personal truck as a work vehicle. If that truck breaks down, a personal loan may help you secure the funds for a repair.
Or perhaps you’ve been saving for your business startup costs, but you have a personal emergency. A personal loan may help you cover those unexpected expenses, so you can maintain your savings for the business.
Ultimately, a personal loan may help you as you start your business, depending on your situation and your budget. But it’s probably not a good fit for major expenses.
Other financing options for your business
Because a personal loan may not be an option, you may also want to explore other ways to finance your business so you can make the best decision for your individual needs.
Conventional business loans
Business loans are specifically designed for business purposes and often come with lower interest rates and higher borrowing limits compared to personal loans. However, business loans typically require a solid business plan and business credit history. So be prepared to have all your ducks in a row when you apply. You may often apply online, but you should check the lender’s processes and requirements before applying.
SBA loans
SBA loans, which are funded in part through the federal government’s Small Business Administration, are another option if you meet certain criteria. For example, your business may need to have fewer than a certain number of employees, and you need to have exhausted other funding options. There are several different types of SBA loans, including microloans for startups and loans for minority owners. Generally, their interest rates are lower than conventional loans, but funding may take longer — up to 90 days. Start by looking at options on the SBA website to see if you qualify.9
Business credit card
A business credit card is a revolving line of credit that can be used specifically for your business expenses. This option offers flexibility, but it’s important to manage your spending carefully to avoid high-interest debt. Using a business credit card responsibly could also help you build your business credit history.
Business line of credit
Much like a credit card, a line of credit gives you access to a set amount of funds that you can draw from as needed. You only pay interest on the amount you borrow, which can be more cost-effective than a lump-sum loan. This option is great for managing cash flow and covering short-term expenses. It’s important to regularly pay your balance on both credit cards and lines of credit on time and in full. Failure to do so may have a negative impact on your credit.
Fuel your business dreams with the funding you need
If you’re ready to launch your business, you have many options for the funding you need to get your big ideas off the ground. While a personal loan may help in some situations, not all lenders allow borrowers to use a personal loan for business costs. So it’s important to be clear about how you plan to use the money and ensure you meet the lender’s requirements before you get too far into the process of applying for a loan. Each financing option has its own eligibility requirements, costs and associated risks for borrowers. As always, it’s important to consider your needs and financial situation before deciding which option is best for you.
Sources:
1 “Personal Business Loans: Compare Financing Options” https://www.nerdwallet.com/best/loans/personal-loans/personal-business-loans
2 “Can I really acquire a personal loan for my business?” https://www.nerdwallet.com/uk/loans/personal-loans/using-a-personal-to-start-a-business/
3 “Does Your Loan Purpose Matter? Yes—here’s how much” https://www.bankrate.com/loans/personal-loans/does-loan-purpose-matter/
4 “Business loan vs personal loan: Which is Right for You?” https://www.nerdwallet.com/article/small-business/business-loan-vs-personal-loan
5 “What is a Hard Inquiry and How Does it Affect Credit?” https://www.experian.com/blogs/ask-experian/what-is-a-hard-inquiry/
6 “How Do Late Payments Affect Your Credit Score?” https://www.creditkarma.com/credit-cards/i/late-payments-affect-credit-score
7 “Can Businesses Use Personal Loans?” https://www.bankrate.com/loans/small-business/can-businesses-use-personal-loans/
8 “What Is the Average Business Loan Term?” https://www.investopedia.com/what-is-the-average-business-loan-term-7550255
9 “SBA vs Conventional Loan: What You Need to Know” https://www.bankrate.com/loans/small-business/sba-loan-vs-conventional-bank-loan/
This article is for general education and informational purposes, without any express or implied warranty of any kind, including warranties of accuracy, completeness, or fitness for any purpose and is not intended to be and does not constitute financial, legal, tax, or any other advice. Parties (other than sponsored partners of OneMain Financial (OMF)) referenced in the article are not sponsors of, do not endorse, and are not otherwise affiliated with OMF.
