Is it a good idea to use personal loans for your business?

You can use personal loans for your business, but before you apply for them, you should ask if your lender allows you to use these loans for business purposes. If you have to fund your business, you can use either personal loans or business loans. However, it is not so easy to choose between both options because both have distinctive benefits and drawbacks.

One of the significant reasons why people's loans will be the best bet to fund your business is that you are looking to start your own business. Getting a business loan with your start-up is very challenging. Lenders might not be willing to approve your application as they cannot be sure that your business will generate enough revenue to be able to repay the debt.

Personal loans are paid back in monthly instalments. These loans do not require collateral, and therefore, the lending money cannot be big enough. Even though you are using a personal loan for your business, it will be issued to you as an individual. It means you cannot show it as a business debt. A lender will look out for your credit rating and personal financial situation to give the nod for the loan.

Personal loans can be used for a business, but there are a few circumstances when these loans prove to be ideal. Having said that, one of the reasons for using these loans is you need money for a start-up. The following situations make these loans more appropriate for personal loans than traditional loans:

• You have consumed other financing avenues

Even if you are not a start-up, you might have to turn to a guaranteed approval personal loan to meet your business expenses as you have exhausted all financing avenues such as business loans, crowdfunding and business credit cards. Taking on another business loan when you have already owed the one might be challenging.

A lender could be doubtful about your repaying capacity, and straightaway refuse you a loan. Crowdfunding does not seem to be a good financial option when you need a large sum of money. This kind of funding is typically suitable only for a start-up when you do not need a big sum.

• You have a good credit score

As a personal loan is given to you, not to your business, a lender will peruse your credit report. Ideally, you will need a good credit file. It is hard to obtain a personal loan for your business when your credit rating is less than perfect, whether you are a start-up or an established business.

• Your repaying capacity is strong

Personal loans are quite expensive as they are not subject to collateral. The risk a lender is taking on is very high in case you make a default. Therefore, a lender will not approve unless they are sure about your repaying capacity. Your financial situation will be thoroughly checked, and you should also be able to reveal backup finances in case your business fails to generate revenues.

Personal loans cannot be ideal to fund all types of business expenses. Here are some of the situations when business loans are a better choice:

• You are an established business

If you have spent years in your business, your financial situation will certainly be strong. It will be much easier for you to make your lender believe that you can repay the debt on time. If you have a decent business credit score and your business revenues have been increasing every year, you can easily qualify for a business loan at a lower interest rate.

• You need a large sum of money

If you need a large borrowing amount, no lender will let you take out a personal loan, whether you are a start-up or an established business. The repayment term of a personal loan cannot be more than 18 months, but business loans can be too long and come with a repayment period of 10 to 15 years as well. So, if you are looking to borrow a large sum, you should consider taking out a business loan.

Personal loans could be cheaper than business loans, and their application process is also smooth. Before you decide whether you should opt for a personal loan for your business, you should carefully weigh the upsides and downsides:

Benefits

Drawbacks

Personal loans are easier to apply for especially when you are a start-up.

You will put your personal credit score at risk if you make a default. In case you have secured the loan, you will lose that asset, too.

The funding is fast. It will take a couple of days to get the money transferred to your bank account.

Unlike business loan interest, personal loan interest payments are not tax-deductible.

You do not have to put down collateral, so there is no risk of losing anything.

The amount of personal loans can be capped at £50,000, while business loans may lend you even more than £100,000.  

You can use these loans for any kind of business expenses provided you inform your lender before.

APRs for personal loans are usually higher, even if you have a good credit score. It can go beyond 35% when you are a subprime borrower.

You can use personal loans for your business, but these loans are not ideal for all types of business expenses. As a start-up, when it is quite difficult to prove your business’ repaying capacity and to come up with a robust business plan, you can consider using these loans. However, bear in mind that you will need a good credit score.

If you are an established business and have built a business credit score and need a large sum of money, you should try to take out a business loan. Keep in mind that most of the lenders will not let you avail of personal loans to fund your business, even if you are a start-up.