You can use a personal loan to fund your business, but the question is: should you? Here are some common reasons you might use a personal loan for business:
You don’t yet own a business:
If you are in the beginning stages of your business and haven’t yet opened your doors or started generating revenue, you are unlikely to be able to find a business loan. Instead, a personal loan can help you finance startup costs and get your business off the ground.
You don’t have the time in business or revenue to qualify for business financing:
If you are already open for business but don’t qualify for financing due to the age of your business or low revenue, you can use a personal loan to keep things operating while you overcome early-business obstacles.
Your business is in a risky industry (such as food service):
Businesses in risky or undesirable industries often have trouble getting a business loan because lenders are afraid, they will not get their money back. Instead, you might find it easier to get a loan that is tied to your personal creditworthiness, not the creditworthiness of your business.
A personal loan is less expensive:
If you have strong personal credit and a low debt-to-income ratio, you might qualify for a personal loan with low rates and fees. This could be a better option than a business loan if your business creditworthiness is not nearly as good as your personal creditworthiness.
These are all good reasons for considering a personal loan for business. However, there are also situations where another financial product would be a more suitable choice for your business. Those scenarios?
You’re applying for a mortgage, car loan, or another personal financing in the near future:
Taking a personal loan for business raises your debt-to-income ratio, which may make it more difficult (or even impossible) to qualify for additional financing until you pay down your debt. If a personal mortgage, vehicle loan, or other types of financing is in your future, you may want to reconsider adding to your debt with a loan used for your business. It is also important to remember that making a late payment, missed payments, or defaulting on the loan will impact your personal credit score, so make sure to make all payments as scheduled.
A final warning before you go down the personal-loan-for-business path: It’s okay to mix personal and business finances in the beginning, but at some point, you’re going to want to separate the two. Even if the funds are technically from a personal loan, I would advise those that are able to set up a business bank account and exclusively use the loan money for business purposes. This will simplify your taxes and accounting processes.