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Should I Take Out a Personal Loan to Start a Business?

crop businesswoman counting money while sitting at desk

Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. Credible Operations, Inc. NMLS # 1681276, is referred to here as “Credible.”

While the U.S. Small Business Administration (SBA) offers SBA loans to new and established small business owners, these loans require the borrower to submit a business plan and often take some time to process — which can mean they’re out of reach for entrepreneurs who need quick access to cash for their ventures.

However, you might be able to get the startup funding you need through a personal loan. Although some lenders prohibit their loans from being used for business expenses, there are others that will let you use the funds to buy inventory, pay for marketing, or cover other business-related costs.

Here’s what you need to know about using a personal loan to start a business:

If you decide to take out a personal loan for your business, it’s important to consider as many lenders as possible. This way, you can find the right loan for your needs.

This is easy with Credible. You can compare your prequalified rates from our partner lenders that offer personal loans for business expenses below in just two minutes.

What is the difference between an SBA loan and a personal loan?

Personal loans are offered by private lenders — such as online lenders as well as traditional banks and credit unions — and can be used for almost any personal expense, such as covering business costs. With a personal loan, you can typically borrow $600 up to $100,000 or more with repayment terms from one to seven years, depending on the lender.

SBA loans, on the other hand, are partially guaranteed by the Small Business Administration. With these types of loans, the SBA guarantees lenders that it will pay up to 85% of the loan if the borrower defaults. These loans range from $25,000 up to $5 million with repayment terms from five to 25 years (depending on how you use the loan).

If you’re considering an SBA loan vs. a personal loan, here are some important points to keep in mind:

 SBA loanPersonal loan
Fixed rates5% to 8% + prime
(depending on loan amount)

2.49%+


(with Credible partner lenders)
Variable rates2.25% to 4.35% + base rate
(depending on loan amount and term)
N/A
Loan amount$25,000 to $5 million$600 to $100,000
(depending on the lender)
Repayment terms5 to 25 years
(depending on how loan is used)
Typically 1 to 7 years
(depending on the lender)
RequirementsYour business must:

 

  • Operate for profit
  • Be engaged in or propose to do business in the U.S. or its territories
  • Have reasonable amount of owner equity to invest
    (usually $1 for every $3 borrowed)
  • Use alternative funding sources (including personal assets) first
Can vary by lender but typically must have:

 

  • Good credit
  • Verifiable income
  • Low debt-to-income ratio
Credit eligibilityPersonal and company credit must show positive payment historiesGenerally have good to excellent credit
Time to fund
  • 5 to 10 business days for standard loans
  • 36 hours for express loans
Usually about 1 week
(depending on the lender)

SBA loan requirements

SBA loans also have additional requirements compared to personal loans. To be eligible, your business must:

  • Operate for profit
  • Be engaged in or propose to do business in the U.S. or its territories
  • Have a reasonable amount of owner equity to invest (generally, $1 of your own money to invest for each $3 borrowed)
  • Use alternative financial resources (including personal assets) before seeking financial assistance

These requirements can make it harder to qualify for an SBA loan as a new business owner compared to getting a personal loan — especially since you’ll also need to provide a full business plan to the lender.

Also keep in mind that both your personal and business credit history will be considered for an SBA loan. However, you’ll also have the opportunity to explain any extenuating circumstances that might have affected your credit history to the lender.

Can I get an SBA loan with bad credit?

Possibly. The Small Business Administration doesn’t have a minimum required credit score for its loans. Instead, it’s up to the lenders that offer these loans to determine who to approve. In general, the credit reports for both you and your company should illustrate positive payment histories and demonstrate your ability to manage your obligations.

However, you might still be able to get an SBA loan with bad credit — for example, if you’ve been in business for several years or if there are extenuating circumstances that led to your poor credit score. In these cases, it could still be worth it to apply for an SBA loan even if you have less-than-stellar credit.

Learn More: How to Get a Personal Loan

Can I get a personal loan with bad credit?

You’ll typically need good to excellent credit to qualify for a personal loan — a good credit score is usually considered to be 700 or higher. There are also several lenders that offer personal loans for bad credit, but these loans tend to come with higher interest rates compared to good credit loans.

If you have bad credit and are struggling to get approved for a personal loan, here are a few options to consider:

  • Apply with a cosigner. Having a creditworthy cosigner can increase your approval chances and might also get you a better interest rate than you’d get on your own. Just remember that because your cosigner shares responsibility for the loan, they’ll be on the hook if you don’t make your payments.
  • Take out a secured loan. While most personal loans are unsecured, there are also some lenders that provide secured personal loans that require collateral. Because these loans are less risky for the lender, it could be easier to qualify for one even if you have poor credit. However, keep in mind that if you can’t make your payments, you risk losing your collateral.
  • Improve your credit. If you can wait to take out a loan, it could be worth spending some time building your credit so you’ll have an easier time qualifying in the future. There are several potential ways to do this, such as making on-time payments on all of your bills or paying down credit card balances.

Check Out: Personal Loans to Consider When You’re Self-Employed

Pros of using a personal loan to start a business

Taking out a personal loan to start a business can be a good choice in some cases, but it isn’t right for everyone. If you’re considering a personal loan, here are a few potential benefits to keep in mind:

  • Lower rates: Personal loan interest rates tend to be lower than rates on credit cards.
  • Might be easier to qualify for: Unlike with SBA loans, you don’t have to worry about providing a full business plan or having owner equity to be eligible for a personal loan.
  • Fast funding: You can usually expect to get your funds within one week — though some lenders will fund loans as soon as the same or next business day after approval.

Cons of using a personal loan to start a business

  • Fewer options for bad credit: You’ll generally need good to excellent credit to qualify for a personal loan — which means you could have a hard time getting approved if you have poor or fair credit.
  • Smaller loan amounts: Personal loans typically range from $600 to $100,000 — less than the $25,000 to $5 million you could get with an SBA loan.
  • Shorter repayment terms: You’ll generally have one to seven years to repay a personal loan, depending on the lender. SBA loans, on the other, provide terms of 10 to 25 years, depending on how you use the loan.
Personal loan prosPersonal loan cons
  • Lower rates than credit cards
  • Could be easier to qualify for than an SBA loan
  • Fast funding
  • Fewer options for bad credit
  • Smaller loan amounts
  • Shorter repayment terms

If you decide to take out a personal loan for your business, be sure to consider your overall loan cost. This way, you can be prepared for any added expenses.

You can estimate how much you’ll pay for a loan using our personal loan calculator below.

Enter your loan information to calculate how much you could pay

Total Payment
$
Total Interest
$
Monthly Payment
$

 

With a
$
loan, you will pay
$
monthly and a total of
$
in interest over the life of your loan. You will pay a total of
$
over the life of the
loan.

Applying for a personal loan for a business

If you’re ready to apply for a personal loan for your business funding needs, follow these four steps:

  1. Compare lenders. Be sure to shop around and compare as many personal loan lenders as possible to find the right loan for your situation. Consider not only interest rates but also repayment terms, any fees charged by the lender, and whether the lender allows its loans to be used for business purposes.
  2. Pick a loan option. After comparing lenders, choose the loan option that best suits your needs.
  3. Complete the application. Once you’ve picked a loan option, you’ll need to fill out a full application and submit any required documentation, such as pay stubs or tax returns.
  4. Get your funds. If you’re approved, the lender will require you to sign for the loan so the funds can be disbursed to you. The time to fund for a personal loan is usually about one week — though with some lenders, you could get your money as soon as the same or next business day after approval.

Learn More: Where to Get a Personal Loan

Choosing the right lender

As you weigh your options, it’s critical to take the time to compare as many lenders as you can so you can find the best loan for your business needs. Here are several important points to consider as you do your research:

  • Loan uses: While the majority of lenders allow personal loans to be used for almost any personal expense, some limit the uses of their loans — and others specifically prohibit using their loans for business purposes.
  • Interest rates: Your interest rate is one of the biggest factors that will determine how much you end up paying for your loan over time. Your credit score and the repayment term you choose will also impact the rates you qualify for.
  • Repayment terms: You’ll generally have one to seven years to repay a personal loan, depending on the lender. While picking a longer term could reduce your monthly payments, it’s usually best to choose the shortest term you can afford to keep your interest costs low. Many lenders also provide lower rates to borrowers who opt for shorter terms.
  • Loan amounts: Personal loans typically range from $600 to $100,000 or more, depending on the lender. You’ll need to think about exactly how much you’ll need for your business and which lenders provide large enough loans.
  • Credit requirements: Most lenders require borrowers to have good to excellent credit to qualify for a personal loan. While some lenders provide bad credit loans, remember that these loans usually have higher interest rates in comparison. If you have bad credit, you might want to consider applying with a cosigner — not all lenders allow cosigners on personal loans, but some do.

If you’re ready to compare your loan options, Credible can help: You can see your prequalified rates from multiple lenders in two minutes — without affecting your credit.

Ready to find your personal loan?
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  • Free to use, no hidden fees
  • One simple form, easy to fill out and your info is protected
  • More options, pick the loan option that best fits your personal needs
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About the author
Emily Guy Birken
Emily Guy Birken

Emily Guy Birken is a Credible authority on personal finance. Her work has been featured by Forbes, Kiplinger’s, Huffington Post, MSN Money, and The Washington Post online.

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