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How to Use a Personal Loan to Start Your Business

You have a dream: you want to start your own business. You have a perfect idea ,Now you just need the start-up capital Can you use a personal loan to get your business going?

May 19, 2021
5 min

You have a dream: you want to start your own business.

You have a perfect idea and have done all of your research. You have great credit and don’t need too much money to get started. Now you just need the start-up capital to turn your dream into a reality. Can you use a personal loan to get your business going?

If this describes you, read on to find out how to use a personal loan to start your business. 

Is it Possible to Use a Personal Loan to Start a Business?

As the name suggests, a personal loan is taken out by an individual to cover personal expenses. A business loan, on the other hand, is issued to a business for business expenses.

Getting a business loan can be difficult. You will need to have incorporated your business and formally registered it as a business. Then you also need to have an established business credit history, have been in operation for over six months, have a balance sheet, and offer collateral for the loan.

If you have a good credit score, a personal loan is much easier to secure. Is it possible to use a personal loan to start your business? Yes! If you are a sole trader and not incorporated as a company, you can find a personal loan that can be used to fund a new or existing business.

As always, it is worth reading through the loan’s conditions to see what is allowed and what isn’t. Some personal loans will allow commercial uses while others won’t.

Be sure to be upfront with your lender. If you are planning on using the money to start a business, tell them that. If you use borrowed money for something other than the purpose agreed upon, you can face issues. 

If your lender finds out you used your loan for a prohibited purpose, you could be forced to repay the borrowed sum with interest immediately.

Who Qualifies for a Personal Loan? 

The first step for how to use a personal loan to start your business is to make sure you qualify for a personal loan. 

Good Credit Score 

You will need to show you have a history of paying back any money that you owed. Although there are bad credit loan options available, they might not be suited to your needs. Firstly, these loans typically come with higher interest rates. Secondly, there may be restrictions on these loans that prevent you from using the funds for business purposes.

Regular Income 

To reassure your lender that you can afford the loan repayments, you need to show you have a regular income. This can be a problem if you are quitting your job to start your business. Many people choose to start their business as a side hustle while otherwise employed so that they have a regular income they can use to reassure their lenders.

Are Personal Loans for Businesses Tax Deductible?

The interest payments on a business loan are tax-deductible. For a personal loan, it is possible to claim your interest payments as a tax deduction. This means you can deduct the interest payments from your business income to decrease the amount of taxable business profit.

To do this, you can only use the loan for business expenses though. You need to keep good records of your expenditure and be able to show how they relate to your business. You need to be on top of your bookkeeping to claim interest payments on a personal loan as a tax-deductible.

Pros and Cons of Using a Personal Loan to Start a Business

A personal loan to start your business can be a very good option if you have a good credit score. You will get quick and easy access to the start-up money you need. It is important to keep in mind you will be liable for repaying a personal loan, regardless of the performance of your business. 

Pros

  • It’s easy - If you are trying to start a new business, or if you are trading as a sole proprietor, you may not qualify for a business loan. But you may qualify for a personal loan. If you have a good credit score, it is probably easier to qualify for a personal loan than a business loan.
  • It’s fast - Unlike a business loan, you can get a personal loan approved on the day of the application. You will likely get funding within a few days of approval.
  • It can be affordable - If you have an above-average credit score, the interest rates on a personal loan can be surprisingly low.
  • It’s versatile - You can use the funds from a personal loan for virtually anything, including a mix of business and personal expenses.
  • No collateral is needed - Although secured personal loans are an option, you generally don’t need to put up collateral to get a personal loan.

Cons

  • It’s risky - You are using your personal credit to fund your business idea. If your business doesn’t succeed, you are putting your personal finances on the line. If you cannot pay back the loan from your business income, you will need to use your personal assets to repay the loan. If you default on your loan, your personal credit will be affected. If you claim bankruptcy, it is in your name, not in the name of the business. If you are unsure whether you will be able to repay the loan, do not use a personal loan to start your business.
  • It can be expensive - Your interest rate is determined by your credit score and your debt-to-income ratio. If you have sub-par credit, the interest rates on a personal loan can be surprisingly high.
  • It might not be enough - Personal loans are typically only worth up to about $50,000. This might not be enough money to cover all of your business start-up costs.

Conclusion

If you have a great business, it is helpful to know how to use a personal loan to start your business.

A personal loan is a great option to use to start your business if you have a good personal credit score. This will mean you will easily qualify for a personal loan, and you will be offered competitive interest rates. If you keep your business and personal expenses separate, you can even claim your interest payments as tax-deductible.

If you are unsure whether you will be able to repay the loan, do not use a personal loan to start your business. You are personally liable to repay the loan, regardless of the performance of your business. When you take out a personal loan to start your business, you are putting your personal credit on the line.


About the author

Rohit Mittal

Founder at Stilt

Rohit is an immigrant, an immigrant working to better the lives of other immigrants — through fintech.

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