Personal Loans for Business: Definition, Cost & Providers

A personal loan for business allows you to borrow funds based on your personal financial condition and creditworthiness, making them a good fit for startup businesses. Personal business loans can include unsecured loans, home equity loans, and credit cards. Interest rates and repayment terms for personal loans vary based on loan type.

LendingClub offers personal loans in amounts up to $40,000 that you can use to fund your business needs. Interest rates start as low as 6.95% APR, with loan terms of either three or five years. You can apply online in a matter of minutes and receive funding within just a few days.

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How Personal Loans for Business Work

A personal loan for business is simply a personal loan that is taken out in your own name and based on your personal credit, but used for business purposes. Personal loans rarely have limitations regarding the use of the loan funds, and therefore can be used to finance your business needs. Because the loan is in your name, you’re personally responsible for repaying the debt.

Using a personal loan for business expenses is different than getting a business loan. With a personal loan, you are directly obligated as the borrower and the loan is reported on your personal credit report. This differs from a business loan, where the business is directly obligated as the borrower and the business owner is generally indirectly obligated by providing a personal guarantee to repay if the business does not. In either case, you’ll carry some personal responsibility for repaying the business debt.

Some personal loans, such as a HELOC, require you to directly pledge collateral. This means your home is directly on the line if you don’t repay the loan as agreed. You may also have to directly pledge personal assets with a business loan, such as potentially with an SBA loan, but this is not as common.

Should you decide to use a personal loan to fund your business needs, keep in mind that it is important to keep your personal and business finances separate, and to maintain proper records for tax and accounting purposes. Make sure that you maintain clear and accurate records of how the personal funds were used for your business.

When a Personal Loan for Business Is Right

It can sometimes be difficult to get a business loan for startup businesses, in which case a personal loan might be your best option. Startup businesses may find it difficult to qualify for a loan, especially if they aren’t generating much in annual revenues yet. Additionally, your small business may not have any available collateral, while you have significant home equity available.

Using a personal loan for business needs may be the right choice if:

• You own a startup business: If you are just starting your business, you may not be established enough to provide business financials, and your business likely doesn’t have its own credit profile yet. Using a personal loan for initial seed money is a viable option.
• Your business has annual revenue less than $50,000: Many small business lenders require that your business be generating at least $50,000 in annual revenues in order to qualify for their loan. If your business is not yet producing enough revenues to qualify, a personal loan may be easier to qualify for.
• You need to borrow $10,000 or less: Using a personal credit card may be one of the fastest ways to obtain a small dollar amount, especially if you already have one in your wallet. For small purchases, a personal credit card can be used to obtain funds quickly. However, make sure to only use the credit card for business purposes so as to not commingle business and personal expenses.
• You need a longer-term loan and don’t have business collateral: Collateralized loans often have lower interest rates and longer repayment terms, because in the event that you fail to repay the loan, the lender can take possession of the collateral. You may have equity in your home that you can use as collateral for a personal loan, but your business may not yet have assets to use as collateral.
• Your business does not have the financial strength to qualify for a loan: If your business is unable to qualify for a loan on its own, a personal loan for business may be a good option. However, keep in mind that you will be personally liable for the loan until it is repaid, even if your business fails.

While these are all valid reasons to use a personal loan to help fund your business, remember that it is important to keep your personal finances separate from your business finances. This is especially important for tax and accounting purposes. Remember that your personal assets and credit are associated with the personal business loan.

When a Small Business Loan Is Better Than a Personal Business Loan

It may be worthwhile to take out a business loan if you can repay it quickly, as it will help establish a credit score for your business. Additionally, if your business can qualify for SBA financing, you may find that an SBA loan actually offers better rates than you could otherwise get through a personal loan.

A small business loan may be a better choice if:

• You want to build your business credit: If your business is growing and you want to begin establishing your business credit, taking out a business loan instead of a personal loan will help grow your business credit history. Establishing your business credit will help you to obtain business financing in the future.
• You will be able to repay the loan quickly: Business loans often have higher interest rates (rates can be as high as 40% APR) and shorter repayment terms (one to three years). If you will be able to repay the loan quickly, it may be worthwhile to apply for a business loan to gain credit history for your business.
• You qualify for an SBA loan: For businesses that qualify for an SBA loan, this will likely be a better choice than using a personal loan to fund your business needs. SBA loans have much higher lending limits (potentially up to $5 million), and have interest rates ranging from roughly 7% to 10%. Another advantage of an SBA loan is that the repayment terms can extend up to 25 years.

It’s important to establish business credit, as it will assist you in getting financing in the future. Business loans often have much higher maximum loan amounts than personal loans, and you won’t want to rely on your personal finances to support your business forever. Additionally, it’s easier to keep your personal and business finances separated with a small business loan.

Where to Get a Personal Loan for Business

There is a variety of lenders that can provide you with a personal loan for business expenses. The bank or credit union where you have your personal accounts is often the first stop, and these financial institutions typically offer the lowest interest rates. Alternatively, online and peer-to-peer lenders are becoming more common, and have fast application and funding processes.

Some of the places you can get a personal loan for business are:

1. Traditional Bank or Credit Union

If you already have a positive relationship with your local bank or credit union, they would be the best place to start a search for a personal business loan. Most banks and credit unions offer home equity loans, home equity credit lines, unsecured personal loans, and credit cards. Additionally, banks and credit unions tend to offer lower interest rates for their products than other alternative lenders. However, keep in mind that their qualification requirements may be more difficult to meet.

2. Online Lender

If you are unable to qualify for a loan through a traditional bank, or do not qualify for as much funding as you would like, you may want to consider using an online lender. Online lenders provide various personal loan options, including home equity loans, home equity lines of credit, and unsecured personal loans.

Online lenders typically have slightly more lenient qualification requirements, including lower credit score requirements than traditional banks. Some online lenders only offer unsecured personal loans, and others, like LendingTree, offer multiple personal loan options like home equity loans and home equity lines of credit.

3. Peer-to-Peer Lender

Another option for obtaining an unsecured personal business loan is a peer-to-peer lender. These are online lending platforms that match borrowers with individual investors. As with online lending, these loans typically have more lenient qualification requirements than a traditional bank.

Because individual investors are putting their own money on the line, peer-to-peer lending is usually characterized by higher interest rates than are offered by traditional lenders. However, they can be a viable source of funds for those who do not qualify for a traditional bank loan. One online marketplace that is good for peer-to-peer lending for unsecured personal loans is LendingClub.

4. Credit Card Issuer

Businesses that need to cover small daily expenses, and will be able to repay the funds within the next 30 days, may find a credit card to be the answer. Credit cards are the most common personal business loan option for small businesses. If your business is not yet eligible for a business credit card, you might choose to use personal credit cards for business purposes.

Common Types of Personal Business Loans

Some common personal loans you may consider using to help finance your business are home equity loans and lines of credit, unsecured personal loans, and personal credit cards. Each of these loan types offers its own unique features; a home equity loan uses the existing equity in your home as collateral, an unsecured loan requires no collateral, and a credit card provides fast and easy access to funds.

Types of Personal Loans for Business at a Glance

Some of the types of personal loans for business you may consider are:

• Unsecured personal loan: For those who do not want to tie up their assets, an unsecured personal loan requires no collateral. Funding amounts are limited primarily by your personal debt-to-income (DTI) ratio and personal credit history. There is no limitation to the use of funds from an unsecured personal loan.
• Home equity loan (HEL) and home equity line of credit (HELOC): If you have equity in your house, home equity loans and home equity lines of credit utilize the current equity in your house as the collateral for a new loan. These funds have no limits on their use, so you can use a HEL or HELOC to invest in funds into your business.
• Personal credit card: Businesses with small or recurring funding needs often choose to use credit cards to cover those expenses. Personal credit cards are generally very easy to obtain, and offer a revolving credit line that you can use and repay over and over again. There are no limitations to what a personal credit card can be used for.

The three primary personal loans that you might use for to help fund your business are home equity loans or lines of credit, unsecured personal loans, and personal credit cards. Each have different potential funding amounts and different qualification requirements. The best personal business loan option for you will depend on the amount of funding you need and how you intend to use the funds

The three primary types of personal business loans are:

1. Unsecured Personal Loan for Business

Unsecured personal loans for business can be a good option if you need financing of up to $40,000. Interest rates on these loans generally range from 7% to 36%, with loan terms typically ranging from three to five years. If you have a credit score of at least 600, with at least three years of credit history, and a debt-to-income (DTI) ratio of less than 40%, you can typically qualify for an unsecured personal loan.

Unsecured Personal Loan for Business Costs

Interest rates for an unsecured personal loan generally range between 7% and 36% APR. A traditional lender, like a bank or a credit union, is typically going to be the least expensive option, with interest rates falling at the lower end of this spectrum. Online lenders will typically offer interest rates closer to the middle or higher end of this range.

The costs you can expect with an unsecured personal loan are:

• Interest rate: 7% to 36% APR
• Origination fee: 1% to 6%

Inclusive in the APR for an unsecured loan will be the actual interest rate charged, as well as an origination fee for the loan. Origination fees for unsecured personal loans can be anticipated to be 1% to 6% of the loan amount.

Unsecured Personal Loan for Business Terms

With an unsecured personal loan, you can typically receive funding in amounts ranging from $1,000 to $40,000. Exact loan amounts offered will vary by lender, and will be based on your credit, your income, and your debt-to-income (DTI) ratio. Standard repayment terms for an unsecured business loan range from three to five years.

The standard terms that you can anticipate with an unsecured personal loan are:

• Loan amount: $1,000 to $40,000
• Repayment term: Three to five years

Repayment terms will vary by lender. Additionally, traditional banks and credit unions typically require monthly payments, while an unsecured personal loan through an online lender may require more frequent payments. These terms will be disclosed to you prior to acceptance of the loan.

Unsecured Personal Loan for Business Qualifications

Precise qualifications for an unsecured personal loan will vary by lender. Generally, a lender will want to see that you have a credit score of at least 600 and a debt-to-income ratio of 40% or less. They will also review your credit history to ensure that you have sufficient history to prove your creditworthiness, and will typically want to see at least three years of positive history.

The typical qualifications for an unsecured personal loan are:

• Credit score: At least 600
• Debt-to-income ratio: Less than 40%
• Credit history: At least three years

Individual lenders may have additional requirements beyond those that we have listed here. Online lenders may have requirements that are less stringent, while traditional banks and credit unions may require higher credit scores and more significant personal credit history.

How to Apply for an Unsecured Personal Loan for Business

Most lenders allow you to apply for an unsecured personal loan online, though some traditional banks and credit unions may require that you complete a paper application. Exact documentation requirements will vary from lender to lender, but you will likely need to supply proof of identity and address, as well as some proof of income.

To apply for an unsecured personal loan, you will likely need to provide the following documents in addition to your application:

• Proof of identity (e.g., driver’s license, Social Security card)
• Proof of address (e.g., utility bill)
• Pay stubs
• Income tax returns

Your lender may require more or less documentation than is listed here. With an unsecured loan, the lender’s primary objective is to be certain that you will have the ability to repay the debt. Since there is no collateral backing the loan, the lender will be thorough in evaluating your income, employment, and credit history.

If an unsecured personal loan seems like the best option for you and your business, LendingClub offers personal loans in amounts up to $40,000. Interest rates on these loans start as low as 6.95% APR, with terms of either 36 or 60 months. You can apply online in a matter of minutes and receive funding within just a few days.

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2. Home Equity Loan or Line of Credit for Business

Both home equity loans (HEL) and home equity lines of credit (HELOC) utilize the equity in your home as collateral for financing. A HEL is a one-time advance of funds that is repaid in equal installments over the term of the loan (up to 15 years), whereas a HELOC is a line of credit comprised of a draw period (typically five to ten years) followed by a repayment period of up to 20 years.

Home Equity Loan or Line of Credit for Business Costs

Interest rates on a home equity loan or home equity line of credit typically fall in the range of 5% to 8%, and vary by lender. You will also need to be prepared to pay closing costs that range from 2% to 5% of the loan amount. These closing costs include such things as appraisal fees, loan origination fees, title search, and recording fees.

The typical costs you can expect with a home equity loan or home equity line of credit are:

• Interest rates: 5% to 8% APR
• Closing costs: 2% to 5%

If you have enough equity in your home to take a home equity loan or line of credit to cover your business expenses, it will likely be one of the least expensive forms of personal loans available to you. Because the loan is secured (by your real estate), lenders offer lower interest rates than they do on unsecured loans.

Home Equity Loan or Line of Credit for Business Terms

Most lenders will only lend up to 80% to 90% combined loan-to-value (CLTV) for a home equity loan or line of credit. This means that your existing mortgage plus the new home equity loan cannot exceed 80% to 90% of your home’s appraised market value. Repayment terms for a home equity loan or line of credit generally range from five to 30 years, and can vary by lender.

Most lenders will approve home equity loans and home equity lines of credit up to 85% combined loan-to-value of your home. This means that the remaining principal on your mortgage plus the home equity loan cannot exceed 85% of the appraised market value of your home.

Home Equity Loan

The typical terms associated with a home equity loan are:

• Loan amount: At least $10,000 (based on CLTV of 85%)
• Repayment term: Five to 15 Years

A home equity loan is a term loan. The amount you are able to receive is based on the amount of equity you have in your house. The loan will be established with a fixed repayment term, and you will repay the loan in equal monthly installments over the course of the repayment term.

Home Equity Line of Credit

The terms you will generally encounter with a home equity line of credit are:

• Loan amount: At least $10,000 (based on CLTV of 85%)
• Repayment term: Five to 30 Years
• HELOC draw period: Interest-only payments
• HELOC repayment period: Principal plus interest payments

Home equity lines of credit are typically set up with the first half of the term being the draw period. During the draw period, you can draw off the line of credit (up to the maximum line of credit amount), and you make monthly interest-only payments on the cumulative amount drawn. The second half of the term is the repayment period. During the repayment period, you make monthly principal and interest payments until the funds are paid in full.

Home Equity Loan or Line of Credit for Business Qualifications

To qualify for a home equity loan or line of credit, you need to have equity in your home. Most lenders require that you currently have 10% to 20% equity, meaning that the unpaid portion of your current mortgage is only 80% to 90% of the current market value. Additionally, you will need to have a personal credit score of at least 660 and a debt-to-income (DTI) ratio of 43% or less.

The general qualifications for a home equity loan or line of credit are:

• Home equity: 10% to 20%
• Credit score: At least 660
• Debt-to-income ratio: 43% or less (some lenders will go up to 50%)

Precise qualification requirements will vary by lender. Traditional banks and credit unions will usually have more stringent qualification requirements, and may require a higher credit score and lower debt-to-income ratio than an online lender. With a traditional lender, you can typically expect a DTI of 43% or less, whereas other lenders may be willing to go as high as 50%.

Be mindful that just because a lender will qualify you for a loan with a DTI of 50%, it doesn’t mean you must take that much funding. The DTI percentage represents the amount of your monthly income you are paying out in debt. Accepting a loan that puts your DTI as high as 50% could make it difficult for you to meet your financial obligations.

How to Apply for a Home Equity Loan or Line of Credit for Business

You can apply for a home equity loan or home equity line of credit through a traditional bank or credit union, as well as through an online lender, such as LendingTree. In most cases, you can begin the application process online through the lender’s website. You will need to submit additional documentation pertaining to your income.

You will likely need to supply the following documents with your application for a home equity loan or line of credit:

• W-2 earnings statements and tax returns for the past two years
• Bank statements for the last few months
• Recent paycheck stubs
• Proof of any other income (e.g., Social Security, investment income)

In addition to the above documentation, you will need information about the home that you are using as collateral. This information will include things like the original purchase price, how much you owe on your current mortgage, and an estimated current value of your home. The lender will use this information to obtain the appraised market value of your home.

For those considering tapping into their property’s equity, take a look at LendingTree. Their online marketplace has a large number of lenders allowing you to compare rates, offers, and find a good fit. Seeing your options takes just a few minutes.

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3. Personal Credit Card for Business

The most common personal business loan utilized by small businesses are credit cards. For businesses that require funding under $10,000 or have recurring expenses that they need to fund for a short time, a credit card is a great option. Interest rates range from 15% to 30% APR; however, there are no interest charges if the balance is paid in full within 30 days.

Personal Credit Card for Business Costs

Using a credit card to pay for your small daily business expenses can be a great solution if you are able to pay the balance off in full monthly. Credit cards typically only charge you interest if the balance rolls into the next billing cycle. Interest rates on personal credit cards typically fall in the range of 15% to 30% APR, and some cards also charge an annual fee.

The typical costs associated with a personal credit card are:

• Interest rate: 15% to 30% APR
• Annual fee: $100

Not all credit cards charge an annual fee, and there are many that don’t. You will want to pay attention to the credit card agreement when selecting a credit card, and be aware of whether or not your personal credit card charges an annual fee.

Personal Credit Card for Business Terms

Credit cards require a minimum monthly payment on the outstanding balance. If you pay the amount in full during the billing cycle in which it was charged, you will not be charged any interest. If you make only the minimum payment on the balance, the repayment period can extend for decades.

The general terms that you can expect with a personal credit card are:

• Credit line amount: $10,000
• Repayment schedule: Minimum monthly payment if you carry a balance

If you were to make only the minimum monthly payment on your credit card, without adding any additional principal to it, it would take between 22 and 30 years to pay off. For this reason, it is always advisable to pay your credit card balance off as quickly as possible. Paying the balance in full during the billing cycle in which you made a purchase avoids paying interest on the funds drawn.

Personal Credit Card for Business Qualifications

Personal credit cards are available for borrowers with virtually all credit profiles. However, the lower your credit score, the higher the interest rates you will be charged and the lower your credit limit will be. If you have a credit score of at least 650, with a debt-to-income ratio of 36% or less, you should be eligible for an interest rate at the lower end of the interest rate range.

The standard qualifications for a personal credit card are:

• Credit score: At least 650
• Debt-to-income ratio: 36% or less

The credit card provider will also want to verify that you have a source of income to ensure that you have a method of repayment. Exact income level requirements vary by lender, with greater emphasis given to your debt-to-income ratio than to your actual income level.

How to Apply for a Personal Credit Card for Business

Applying for a personal credit card is a very straightforward process. Once you decide which credit card you would like to apply for, you can complete the simple application process directly on the provider’s website. You should receive your credit limit and approval within 24 hours, and will receive the physical card in the mail within 10 days.

Review the Best Personal Credit Cards for Business

Pros & Cons of Using Personal Loans for Business

There are advantages and disadvantages to using personal loans for business. It’s often easier to qualify for a personal loan than for a business loan, especially if you are a startup business, and interest rates are generally lower. Unsecured personal loans do not require collateral or UCC filings. However, personal loans often offer smaller loan amounts, don’t contribute to your business’ credit profile, and the repayment terms are often short.

Pros of Using Personal Loans for Business

Some of the advantages of using a personal loan for business are:

• A personal loan may be easier to qualify for: Because a personal loan is based on your personal credit score and your personal income, they may be easier to qualify for than a business loan. This is especially true if your business is still in the early startup phases and hasn’t had the opportunity to prove itself yet.
• You may be able to get a better interest rate: If you have a great credit score and substantial income, you may qualify for a lower interest rate on a personal loan than you can get on a small business loan. Some personal loans offer rates as low as 5% APR, while even the best rates on an SBA loan start at over 7%.
• A personal loan may not require collateral: With an unsecured personal loan, the loan is truly unsecured. There is no collateral, and there is no UCC filing against your assets whereas with an unsecured business loan, you are often required to provide a personal guarantee as well as a UCC filing against your business.

Cons of Using Personal Loans for Business

Some of the cons of using a personal loan for business are:

• Your loan amount may be smaller than with a business loan: Generally, personal loans, especially unsecured loans, offer lower lending amounts than many small business loans. Even if using home equity as collateral, it would be difficult to obtain a personal loan equivalent to the $5 million maximum loan amount offered by the SBA.
• You won’t be building business credit: By taking a personal loan to fund your business needs, you won’t be building any business credit history. Keep in mind the personal loan will appear on your personal credit report, and will impact your personal credit score.
• Your repayment term may be too short: Aside from home equity loans and home equity lines of credit, the maximum repayment term for a personal loan rarely exceeds seven years. If you need to borrow a substantial amount of money and need a longer repayment term, a small business loan through the SBA may be a better option.

A personal loan for business can be a great choice if your business is having difficulty qualifying for financing on its own or you are able to get better rates and terms. However, a personal business loan isn’t the right choice for everyone. This is especially true if you need a larger dollar amount or longer repayment terms to finance the needs of your small business.

Alternatives to Personal Loans for Business

If you aren’t comfortable putting your own credit at risk by using a personal loan for business, there are other options available. A rollover for business startup could allow you to use your retirement funds to fund your business. Other businesses may choose crowdfunding to raise money for their business needs. Additional alternatives include using an SBA microloan, or finding an angel investor.

Some alternatives to using a personal loan for business are:

Rollover for Business Startups (ROBS)

If you have retirement savings that you are willing to invest in your business, a rollover for business startups (ROBS) allows you to utilize funds from your retirement account to provide funding for your small business. A ROBS is not a business loan, so there’s no debt to repay or interest payments to make. You can use a rollover for business startups without paying any early withdrawal penalties or taxes on the funds used from your retirement account.

Crowdfunding

Another alternative to a personal loan for business is crowdfunding. Through crowdfunding, small businesses can raise money in exchange for rewards, future repayment, or an equity stake in their company. The best crowdfunding sites have the ability to get your funding campaign in front of a large audience of potential investors, have low fees, and allow a variety of campaigns.

SBA Microloan

If your business only needs a small loan, an SBA microloan may be a good fit. SBA microloans are loans up to $50,000 that are funded by the Small Business Administration but originated by SBA-approved, community-based nonprofits. SBA microloans have terms up to six years and are targeted for smaller businesses and startups. They typically have low rates and relaxed qualifications, but specific rates and qualifications are set byhttp://what-is-a-microloan the lender.

Angel Investor

Startup businesses with the potential to scale quickly may want to consider approaching an angel investment firm. Angel investors are individual investors who provide funding to your business in exchange for an equity stake. Because angel investors are providing their own personal money, they are investing as much in you, the business owner, as they are in your business. An angel investor will want to be confident in your ability to succeed as well as in your business’ projected growth.

Personal Business Loan Frequently Asked Questions (FAQs)

A lot of information has been provided about using personal loans for business, what personal loan options are available, what the various rates, terms, and qualifications are, and what you need to apply for a loan. If you have any questions about any of the information presented here, you can post them in the Fit Small Business forum.

Some of the frequently asked questions related to personal loans for business are:

Can I use a personal loan to buy a business?

Personal loans do not typically have restrictions regarding what you can use the funds for, so you could potentially use a personal loan to buy a business. Remember that you will be personally liable for the debt, as the loan would be made to you as an individual and not to the business.

Is it better to get a personal loan or a business loan?

Whether it is better to get a personal loan or a business loan to fund your business depends on your specific circumstances. Personal loans, like home equity loans, may provide you with more flexible spending options and lower interest rates than you can get with a business loan. However, if you qualify for an SBA loan, that will likely be the best option due to the availability of higher loan amounts and longer repayment terms.

How do I get a personal business loan?

Most banks, credit unions, and online lenders offer various personal loans, including home equity loans, unsecured personal loans, and credit cards. You can apply online, or in person, with the documentation required by the lender. If you meet the qualification requirements and receive a loan, the personal loan funds can be used for your business needs.

Bottom Line

Using a personal loan for business can be a viable option if your business does not yet qualify to obtain a business loan. Some personal business loan options include unsecured loans, HELOC/HELs, and personal credit cards. However, if your business is able to qualify for a business loan, especially one with good rates and terms, like an SBA loan, you may want to consider that option over a personal loan.

If a personal loan for business seems like the right option for you, with LendingClub you can get a personal loan up to $40,000 that you can use to finance your small business needs. Interest rates start at just 6.95% APR, and repayment terms can extend up to 60 months. Applying is easy and can be completed in just a matter of minutes.

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