You can use a personal loan to cover a wide variety of expenses — including starting a business.
In fact, this may even be a better option than a small business loan in some cases, since it can be easier to qualify for. However, it’s important to understand how both loan types work to ensure you choose the right one for you.
A personal loan is a type of installment loan. You receive a lump sum of money from the lender and can use that money to pay for a variety of expenses (unlike a mortgage or auto loan, which can only be used in one way).
You repay personal loans in fixed monthly installment payments, plus interest, for a predetermined term. Loan amounts can be on the smaller side (several hundred dollars) but can also go as high as $100,000 or more. Repayment terms vary by lender, but they’re typically between two and seven years.
As flexible as personal loans are, you still need to be upfront about what you intend to use the loan funds for.
“Prior to applying for a personal loan that you intend to use for business purposes, make sure you check for possible restrictions that the lender might have put in place,” said Ohan Kayikchyan, a certified financial planner with a doctorate in economics. “There have been cases when the lender found out that a particular loan is used for prohibited purposes and recalled the loan ahead of the repayment schedule.”
Related: Learn more about getting a personal loan on Credible.com
A small business loan is designed to cover business expenses like hiring staff, buying equipment, or renting office space. You can use a business loan to cover any business expenses you can’t afford on your own. This is a popular option with new entrepreneurs who may need help building a business from the ground up.
With a small business loan, you typically make a series of payments that include interest charges. A business loan can have a wide variety of repayment terms, depending on the type of loan you get. Some business loans need to be paid back in a few days or months, whereas others have years-long repayment terms.
You have several options for small business loans, including:
A personal loan makes a lot of sense for brand-new entrepreneurs who have yet to establish a business credit score.
“If a business is pretty new and without a solid revenue stream, then getting business loans can be almost impossible,” Kayikchyan said. “In such situations, business owners utilize their personal credit score and income to get the loan for business. The loan will be in the owner’s name, not the business’s name; hence the owner is liable for the loan repayment personally.”
If you need funds urgently, it may also make more sense to get a personal loan. You may be able to get approved and funded much faster since the application process is more streamlined. Some lenders even offer same-day funding.
Related: Learn more about getting a personal loan on Credible.com
A small business loan may make more sense for more established businesses, especially those seeking large amounts of capital. Business loans tend to offer higher loan amounts than personal loans.
Plus, many business loans require you to have been in business for a certain period of time and meet minimum revenue requirements.
Before you take out a personal loan to use for business expenses, it’s important to consider the benefits and downsides of doing so:
There are also some advantages and disadvantages associated with business loans:
If you decide that neither personal loans nor small business loans are right for you, these other financing options may be a better fit: