How to get a personal loan to cover business expenses

September 11, 2019 - 4 min read

You don’t always need a business loan to cover business expenses

New and small businesses often need financial help to grow their companies. Borrowing funds can help pay for business costs. These include things like producing goods and services, payroll, supplies, and renting an office. However, many banks are hesitant to lend to small and new businesses. Fortunately, entrepreneurs can turn to a personal loan for business expenses.

A personal loan can be a smart way to pay for business costs. It can be easier to qualify for a personal loan, and you’ll likely get the money quickly. But it’s not the only lending option businesses should check out.

Learn what’s involved and the lending choices available. Ask plenty of questions. And compare financing opportunities carefully. You may determine that a personal loan for business expenses is worth pursuing.

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A personal loan for business can help

If you’ve recently launched a company, you know that cash flow can be tricky. Or if you’re a one-person operation or small business that wants to grow, you could probably use an infusion of quick capital.

Problem is, many banks and lenders won’t give you a business loan. That’s because you haven’t been in operation long enough and they see you as a risky bet. Or they’re not impressed by your growth and earnings thus far or your long-term business plan. If you get turned down for a business loan, don’t despair. One option to consider is taking out a personal loan to pay for business costs.

The good news is that, if you qualify, you can use personal loan funds for virtually any business expense. That’s true, provided the lender doesn’t place any limits on what you can use the funds for.

“There are many potential uses for personal loan funds,” says Bruce Ailion, Realtor and property attorney. “You could use the money to buy a building for your business. You could purchase more inventory to sell. Maybe you’re seeking to finance receivables. Perhaps you’re interested in buying out a competitor. Or you’re seeking to expand to a new location.”

A personal loan can help with all of these scenarios.

How personal loans for business work

A personal loan, sometimes called a signature loan, is an unsecured loan. An unsecured loan does not require physical collateral—such as your home—to secure repayment. The lender usually only requires your signature and pledge to repay the loan.

Yet, as no physical collateral is needed, a personal loan is considered riskier for the lender. As a result, they may charge a higher interest rate on a personal loan than they would for a secured loan like an auto or home equity loan. The lender may also but a lower cap on what you can borrow vs. a business loan.

Here’s another caveat: You could put a dent in your personal credit. Say you don’t stay current on repaying the loan. Or you lose clients and struggle financially. That could drop your credit score and make it harder to get other types of credit in the future.

The good news? It’s often not as hard to qualify for a personal loan than a business loan (more on qualifying below). The terms of the loan can also be friendlier than for a business loan. And you should be able to receive the money within a few days of applying.

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Who can benefit

Any business owner can apply for a personal loan. But the experts recommend having your financial house in order first.

“You need to show good credit,” says Susan Naftulin, president of Rehab Financial Group, LP. “You need to show good income and good cash on hand, too. It will also help your cause if you have an ongoing positive relationship with that lender.”

Hunter Stunzi is senior vice president of Business Loans at Lending Tree. He says lenders will “also look closely at your debt-to-income ratio and credit repayment history.”

In addition, “you need to be comfortable with your ability to repay the money,” Naftulin adds. “If your business will not put you in a position to repay, you’ll have to tap into personal resources to repay that debt.”

To help your cause, get your paperwork in order.

“Prepare to present document showing what your business is,” Mayra Rodrigues Valladares, managing principal with MRV Associates, suggests. “Have financial statements ready, especially ones that show revenues and expenses. Having a cash flow statement with sources and uses of funds for the business is also useful.”

You can seek a private loan from a brick-and-mortar or online bank, credit union, finance company, or private lender.

“Comparing multiple lenders and options ensures that you’ll find a better deal,” notes Stunzi. “Compare the rates, terms and fine print carefully. You need to fully understand the terms of repayment, no matter which avenue you choose.”

Alternative actions

Brace yourself: It’s possible you may not qualify for a personal loan for business expenses.

“Many personal loan lenders are highly averse to lending money for business purposes. That’s because, if a business owner is looking for personal loan funds to finance their business, it probably means they can’t qualify for a small business loan. Many lenders may view that as a red flag,” Stunzi notes.

If you get turned down, you can explore other options. If you haven’t already tried, apply for a Small Business Administration (SBA) loan.

“With an SBA loan, the government guarantees a portion of the loan. This allows lenders to offer you a better rate,” Ailion says.

Plan C? “Apply for a home equity line of credit and use the money for business purposes. Often this is the easiest and cheapest source of funding for a business. Interest rates are currently below 5 percent. And they’re fairly easy to obtain,” adds Ailion. “But you have to use your home as collateral.”

Alternatively, seek out an angel investor. This is a private investor who offers to back your company financially in exchange for ownership equity in your company. An angel investor can be a family member or friend willing to take the risk.

Lastly, if necessary, consider using credit cards to fund your business. But be prepared to pay extremely high rates of interest if you can’t pay off your balance in full each month.

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Erik J. Martin
Authored By: Erik J. Martin
The Mortgage Reports contributor
Erik J. Martin has written on real estate, business, tech and other topics for Reader's Digest, AARP The Magazine, and The Chicago Tribune.