Businesses of all shapes and sizes need several things for success: A viable product or service, a plan to reach customers, and sufficient funding to operate and market effectively. It’s this last step that catches some new business owners off guard. How should you fund a new or growing business?
Small business owners now have many options, including business credit cards, business lines of credit, business term loans, and more. One of the simplest and often quickest options is to instead take out a personal loan and use it for your business expenses.
A personal business loan is a loan issued to an individual, rather than a business entity. The loan can be used for any purpose, including funding business expenses. Most personal loans can be used for business purposes, but be sure to check the fine print of your bank’s terms.
Like any other form of business financing, there are both advantages and disadvantages to using a personal loan to fund a business. Here are some considerations to keep in mind, and some insights on how personal loans stack up against other small business loans.
Check out our complete guide to Small Business Loans
Advantages of business personal loans
Lower APRs than credit cards
For well-qualified borrowers, personal loans almost always have better interest rates compared to credit cards. That said, if you have moderate credit, you may pay a similar APR to a credit card – and if you have bad credit, you likely won’t get approved for a personal loan.
Flexible and versatile
Personal loans can be used for any purpose. And the issuing bank doesn’t really need to know what you’re spending every dollar on. Some solopreneurs and sole proprietors opt for personal loans as they allow for flexible coverage of both business and personal expenses.
Ease of approval
Compared to traditional business loans, personal loans are generally easier to get approved for. The loan application can usually be done completely online, and qualifying is often easier than with a business loan. This is particularly true when it comes to a startup or new business. Without a record of revenue and several years in business, it can be tough to get approved for a business loan. With a personal loan, lenders look solely at your credit report and personal credit history. You won’t need to show a business plan, prove the eligibility of your business purchases, or show significant annual revenue in order to qualify.
Disadvantages of business personal loans
No protection for your personal finances
If you have a LLC or corporate business structure, there will be some level of protection for your personal assets, should you default on loans. However, this is not the case with a personal loan, as it is tied directly to you as an individual, rather than your business entity. This is the biggest difference between personal loans and more traditional options like Small Business Administration loans (SBA loans).
Tax considerations
Some business loans qualify for specific business tax deductions, most notably on the interest payments made. However, because personal loans are not business-specific, they usually do not qualify for these tax breaks. Speak with your tax advisor to discuss the implications of this.
Limited loan size & terms
Personal loans are typically smaller, and often shorter-term than traditional business loans. For small companies seeking startup capital, they present a versatile option – but for established businesses needing substantial funding, or long-term loans, personal loans likely won’t suffice.
What to look for in a loan provider
When choosing a loan provider, these are the most important considerations to keep in mind:
1. Competitive APR
The specific annual percentage rate (APR) you are offered will vary depending on your personal credit score, and other factors. Personal loans can be anywhere from 6% to 36% interest, depending on creditworthiness and loan size. The available interest rate is likely one of the most important considerations when selecting a provider. You’ll likely have to go through at least part of the application process in order to learn what APR you may qualify for, but this will likely still be worth doing if you want to compare a few providers. For a thorough analysis, run the numbers to see how much the loan will cost you in the long run. This helps you analyze whether or not a relatively small difference in APR will make a substantial difference.
2. Available loan terms
Personal loans tend to be available in terms between 24 months and 60 months (2 to 5 years). The term you should choose largely depends on your business and your expected repayment timeline. For many new companies, having a longer-term is attractive, as it gives young businesses more flexibility. Banks differ in the terms they offer, so seek out a provider that fits your needs. Online lenders may offer a wider variety of terms for those with good credit.
3. Competitive fees
There will be various fees associated with almost any type of loan. Origination fees, application fees, late payment fees and prepayment fees can all tack on costs to your loan. Fortunately, personal loans often have fewer fees than traditional business loans – even so, you should compare costs at different providers.
4. Maximum loan amount
Personal loans are often smaller than standard business loans. If your business needs substantial funding and needs to maintain cash flow with low monthly payments, be sure to shop around to see the maximum loan amount that you may be qualified for with various providers. If the amount doesn’t suffice, you may need to look into other financing options.
5. Customer service
Choosing a loan provider with good customer service is important. Perhaps no issues will arise with your loan – but if they do, you will be thankful for a genuinely helpful customer support team. You can look at customer reviews of personal loan providers to gauge a company’s reputation. Small banks and credit unions are often known for great customer service, although online lenders may offer better repayment terms.
6. Unique perks
Some banks and financial institutions have various perks, such as rewards programs or member rebates. In some cases, it’s worth checking with your existing bank or credit card provider to explore loan options.
Best personal business loan providers
There are many options when it comes to personal loans for business funding. The business lenders and personal loan providers below have been selected based on a combination of available APRs and loan terms, customer service, and feedback from past borrowers.
Rocket Loans
Rocket Loans is an online financial services provider, specializing in personal loans and mortgages. Their personal loan terms specifically allow business use, so there are no issues with using Rocket Loans for a personal business loan.
Rocket Loans uses a streamlined, 100% online process to get you funded fast. In fact, qualified borrowers can actually get same day funding. You can get pre-approved within seconds to get instant loan offers – and preapproval will not affect your credit score.
Rocket Loans details
- Personal loan amounts from $2,000 to $45,000
- Loan terms of 3 years or 5 years
- Estimated APR from 7.16% to 29.99%, depending on credit
- Origination fee ranges from 1% to 6% of the loan amount
- $15 fee for late fee/unsuccessful payment
- Minimum credit score of 640
- No prepayment penalty
Advantages
- Ultra-fast loan origination and funding
- Same-day funding available for qualified borrowers
- Competitive rates for borrowers with good credit
- No penalty for prepayment
- Autopay qualifies for a rate discount
- Pre-qualification is a soft credit check (and won’t affect your credit score)
Disadvantages
- Origination fee is mandatory; 1-6%
- Only two loan terms available; 3 or 5 years
- No options for co-signing or joint loans
Discover Personal Loans
Discover is a large financial institution that offers credit cards, savings accounts, personal loans, and more. As one of the largest lenders on this list, they can offer some of the most competitive rates. Also, they do not charge origination fees, which is very unique in the industry. They also have flexible repayment terms, spanning from 3 years to 7 years.
Discover Personal Loans can be used for any purpose. “Business” is not an included category, but Discover has confirmed that personal loans may be used for business purposes.
Discover personal loans details
- Personal loan amounts from $2,500 to $35,000
- Loan terms of 3 to 7 years
- Estimated APR from 6.99% to 24.99%, depending on credit
- No origination fee
- Minimum credit score of 660
- No prepayment penalty
Advantages
- No origination fee (save 1-6% of the loan amount compared to competitors)
- Advanced mobile app to manage loan and monitor credit
- Wide variety of repayment terms
- Fast funding – as quick as the next business day
Disadvantages
- No options for co-signed or joint loans
- Requires higher credit scores than many competitors
LendingClub
LendingClub is a peer-to-peer financing platform and microloan issuer. What that means is that you can borrow directly from investors, who fund these personal loans instead of a traditional bank. They specifically allow business usage for personal loans, so there is no issue with using LendingClub for small business funding.
LendingClub’s application process is straightforward and fast. They offer personal loan terms of 3-5 years. They also support borrowers with fair credit, as their minimum credit score is 600 (many lenders require at least 640).
LendingClub details
- Personal loan amounts from $1,000 to $40,000 (minimum loan amount varies by state)
- Loan terms of 3 to 5 years
- Estimated APR from 10.68% to 35.89%, depending on credit
- Origination fee ranges from 1% to 6% of the loan amount
- Late fee: $15 or 5% of payment, whichever is greater (15-day grace period included)
- Minimum credit score of 600
- No prepayment penalty
Advantages
- Get pre-qualified with a soft credit check (no impact to credit score)
- Get funded directly by individual investors
- Minimum credit score of 600; most lenders require 640+
- Offers debt consolidation loans
- Co-signed and joint loan options available
Disadvantages
- Rates are often higher than competitors
- Funding is slower due to the peer-to-peer model
- Origination fee of 1-6%
Avant
Avant is a loan issuer that offers easy personal loans online. They offer quick funding, with next-day funding for qualified borrowers. With Avant, you can borrow between $2,000 and $35,000 as a personal loan.
Avant is a good option for borrowers with below-average credit. They have a minimum credit score of 550, rather than the average of 600-640+. Of course, borrowers with low credit will pay higher interest rates – but at least Avant provides loan options for this type of borrower.
Avant details
- Personal loan amounts from $2,000 to $35,000 (minimum loan amount varies by state)
- Loan terms of 2 to 5 years
- Estimated APR from 9.95% to 35.99%, depending on credit
- Origination/administration fee of up to 4.75%
- Late fee: $25 in most states
- Minimum credit score of 550
- No prepayment penalty
Advantages
- Fast funding (next business day)
- Soft credit pull for prequalification (no affect on your credit score)
- Supports borrowers with lower credit scores
Disadvantages
- Administration/origination fee of up to 4.75%
- Higher late fee than most competitors ($25)
- No options for co-signing or joint loans