Opinions expressed by Entrepreneur contributors are their own.
Using a personal loan for your business might seem like a quick fix to get the money you need. As a business owner, you want to make sure your company has enough funds to grow and succeed. But you need to know the risks of mixing personal and business finances.
Many business owners pick personal loans because they’re easier to get, especially for new businesses. When you apply for a personal loan, lenders look at your credit score, credit history, income and personal debts to decide if you qualify.
Unlike business loans, they don’t check your business credit, cash flow, yearly revenue or business debts. If you have good personal credit, steady income and manageable debt levels, you’ll likely get approved for a personal loan. This makes personal loans attractive for business owners who can’t get traditional business loans. However, these loans come with downsides.
You can get personal loans from banks and online lenders. These loans often don’t need collateral, making them more accessible than Small Business Administration (SBA) loans or standard bank loans.
Related: 5 Rules for Going Into Personal Debt as an Entrepreneur
Business loans vs. personal loans: Which is better?
Your credit score plays a big role in choosing between business and personal loans. Personal loans show up on your personal credit report and affect your credit score. Paying on time helps your credit, but missed payments hurt it. Taking personal debt for business could also make it harder to get other loans later.
Personal loans always require a personal guarantee. This means you’re personally responsible if you can’t pay the loan back. Even without collateral, lenders can take legal action if you default. Some business loans need personal guarantees, too, but not all of them do.
To pick the right loan, look at both the risks and benefits. Think about the financial dangers. For example, using a home equity line of credit for your business puts your house at risk if the business fails. Most new businesses close within five years — can you keep paying the loan if your business doesn’t work out?
When to consider a personal loan for business
If you can get a business loan with good terms, that’s usually the better choice. Business loans keep your personal and business money separate, and they might offer tax breaks on interest. They also limit your personal risk. But sometimes, personal loans are the only option.
You might need to think about a personal loan if:
-
Your business is new and hasn’t been around for two years, making it hard to get business loans
-
Your business isn’t making enough money, or sales have dropped lately
-
You run a business that lenders see as risky (like multilevel marketing, gun sales, alcohol sales or cannabis)
-
You want to avoid high-cost business loans and need cheaper options
Most business loans don’t clearly show their true cost. Some charge very high rates. Personal loans often cost less than business financing options.
Business loans can strain your cash flow with frequent payments — sometimes daily or weekly. Personal loans stick to monthly payments, which are easier to manage.
Related: The Ultimate Guide To Personal Loan
Is it easier to get a business loan or a personal loan?
Getting approved for a personal loan depends on two main things:
-
Your credit score
-
How much money you make
With good credit and steady income, you can get a personal loan without much trouble.
For business loans, lenders check:
-
How much money your business makes
-
Your personal and business credit
-
How long you’ve been in business
-
What type of business you run (some businesses face more limits)
To get a business loan, you need bank statements that show your business income. Opening a business bank account helps if you don’t have one. Traditional bank loans and SBA loans need more paperwork, like business plans, tax forms and financial reports. These loans take weeks or months to process. Online lenders move faster, often deciding within days.
Good and bad points of using personal loans for business
Good points:
-
Simple paperwork: Personal loans need less documents than business loans
-
Quick money: You get funds faster with personal loans
-
No business credit needed: Lenders check your personal credit instead
Bad points
-
Personal risk: You’re responsible for the debt, and missed payments hurt your credit
-
Higher rates: Personal loans often cost more than secured business loans
-
Lower loan amounts: You can’t borrow as much as with business loans
-
No business credit boost: Personal loans don’t help build your business credit score
When personal loans make sense (and when they don’t)
When to use a personal loan:
-
New businesses that need small amounts: Starting businesses often can’t get business loans
-
Quick projects with clear returns: When you know you can pay back the loan soon
-
Business owners with no business credit: Personal loans might be your only choice
When to avoid a personal loan
Large-scale investments: Personal loans rarely cover big business projects that need lots of money
High-risk ventures: If you’re not sure about paying back the loan, don’t risk your personal assets
When other funding options exist: Look into business loans, grants or other funding first.
Related: The 7 Different Loans You Can Get as a Business Owner
Other factors to consider
Legal considerations:
Many lenders don’t let you use personal loans for business. Breaking these rules can lead to money problems.
Tax considerations:
You can’t deduct personal loan interest on your taxes. Business loan interest often counts as a tax write-off when used for business.
Expense management:
Using personal money for business makes tracking expenses hard. This can cause problems if you get audited.
Personal loans give you quick cash, but they’re risky. Business loans and other funding choices work better for most companies. Look at all your options and think about long-term effects before taking on debt.
