Pros and Cons of Using a Personal Loan for Business Expenses

Kat Tretina

Updated On: May 5, 2022  •  3 Minute Read

Loans

If you dream of starting a business or want to expand your side hustle, finding the money you need to make your goals a reality can be difficult. Most business loan lenders require you to be in operation for several years before you can qualify for a loan; if your business is new, you won’t be eligible for a loan.

If that’s the case, you have another option — personal loans. With this approach, you take out a personal loan and use it to pay for your business expenses. While a personal loan can be useful, there are both positives and negatives to this strategy you should consider before applying for a loan.

Benefits of using a personal loan for your business

If you’re thinking about taking out a personal loan to buy new inventory or to boost your cash flow, there are several benefits to keep in mind:

1. You can get your money quickly

With most business loans, the application process can take several weeks or even months. By contrast, taking out a personal loan is quick and easy. In most cases, you can complete an online application in five minutes and receive a decision right away. If a lender approves you for a loan, you can get the money you need deposited into your bank account within two business days.

2. You don’t need collateral

Business loans typically require you to put down property as collateral. If you fall behind on your payments, the lender can put a lien on your property until it’s repaid.

However, personal loans are usually unsecured, meaning they don’t require any form of collateral. Instead, lenders look at your personal credit score and income to decide whether or not to issue you a loan. With a personal loan, there’s no risk of losing parts of your business.

3. It’s easier to qualify for a personal loan

Business loans require you to be in business for several years and to meet certain revenue requirements. Personal loans, on the other hand, have much simpler qualification criteria.

Rather than looking at your business’ finances, lenders will only review your personal credit history. If you have good credit and a stable income, you can easily qualify for a personal loan without having to go through a ton of red tape.

Cons to using a personal loan for your business

Using a personal loan for business expenses can be a good idea, but make sure you consider these drawbacks:

1. Personal loans can have high interest rates

Personal loans can have very low interest rates, but only those with excellent credit will qualify. If your credit is less-than-stellar, you may have to settle for a loan with an interest rate of 20% or more — far higher than you’d get with a loan from the Small Business Administration, for example.

2. Personal loans tend to be for smaller amounts

With business loans, you can borrow large sums of money. For example, Small Business Administration loans allow you to borrow up to $5 million.

Personal loans tend to be for much smaller amounts. Most lenders allow you to borrow no more than $100,000. If you have a large business expense coming up, a personal loan may not be enough to cover the cost.

3. You risk your own credit

When you use a personal loan for business expenses, you’re putting your own credit at risk rather than your business’ credit. If your business fails and you’re no longer able to keep up with the payments, you personal credit could be destroyed. That problem can impact you for several years, making it difficult or downright impossible to qualify for other kinds of credit, including mortgages or car loans.

Applying for a personal loan

If you’re trying to expand your business or start it from scratch, a personal loan can help you achieve your goals. If you decide that taking out a loan is right for you, compare offers from several different personal loan lenders to ensure you get the best rates.