What You Need to Know About Personal Loans

If your small business needs financing, applying for a personal loan is a common approach used by many business owners. Although banks, online lenders, and credit unions offer small business loan options, using a personal loan can be a fast and more convenient option. Read on to learn more about personal loans and why you should use them for funding your business.

What Is a Personal Loan?

A personal loan is money borrowed from a bank, online lender, or credit union that has many uses, including funding a business. Personal loans do not require collateral and you pay the loan back in fixed monthly payments over two to five years.

Typically, you can borrow up to $40,000 sometimes higher depending on the lender through a personal loan. The annual percentage rates on personal loans range from 5% to 35% which can be lower than traditional business loans.

When You Should Consider a Personal Business Loan

There are three instances where using a personal loan to fund your business will be beneficial for you.

  • If you do not qualify for traditional small business loans, you have a better chance of qualifying for a personal loan. Sometimes the startup phase or business debt prohibits lenders from approving for traditional loans.
  • If you do not have collateral, you can still get funding for a personal loan since it is not required.
  • If your funding needs are varied, you can use a personal loan for many reasons. Traditional loans are more specific and have restrictions with their usage.

Pros and Cons of Using a Personal Loan for Small Business

There are various factors that depend on whether it makes sense or not to purse a personal loan for your small business such as how much you plan to borrow and your personal credit history.


  • Easier to obtain than business loans: lenders look at your credit history and income when you apply for a personal loan rather than your business’s finances. With a traditional business loan, you would have to provide a business plan and extensive documentation to qualify.
  • Receive funds quickly: applying for traditional business loans, such as the SBA loan, can take several weeks or even months. Personal loans are distributed in days so if you need fast funding then a personal loan is just what you need.
  • Collateral is not required: most lenders require you to have collateral because in the case that you default on the loan, the lender can seize the assets. Personal loans do not require collateral so if you do not have any this would be a good option for you.
  • Low APRs: personal loans tend to have lower APR rates than credit cards which can save you a lot of money over the lifetime of the loan. A business loan can be more costly if your business credit is poor.
  • Reasonable repayment terms: some business financing requires daily and weekly repayments while with a personal loan the repayments are monthly.


  • Your personal credit is at risk: you put your own credit on the line when you take out a personal loan. Your credit score can suffer if your business fails or if you fall behind on payments.
  • Limits on how much you can borrow: lenders put a limit on how much you can borrow so if your business needs require a large amount of funding, a personal loan may not be right for you.
  • High interest rates: personal loan lenders offer low rates but those are reserved for those who have high incomes and excellent credit scores.
  • No tax credits: you do not get tax credits for your interest payments like you would with a business loan.
  • Less support: getting a business loan means gaining access to tools and experts to help you grow your business. With a personal loan you do not get the same support.

The Bottom Line

Weigh your options when you are considering a personal loan for business use. Determine which is the best type of funding for your business by looking at rates and repayment terms. When you are comparing loans consider how much you can borrow, APR, repayment terms, minimum credit score to qualify, and funding speed. Before you apply check your personal credit report and score to give you a better idea of what you are more likely to qualify for. Keep in mind that the lower your score, the higher your APR will be.