Can businesses use personal loans?

Personal loans aren’t just for weddings and home remodeling — some lenders also allow you to use them for business purposes. Although business loans are typically the better option thanks to their lower rates and higher limits, personal loans may make sense for startups and other businesses that struggle to qualify.

However, using a personal loan for your business can mean paying higher rates for less money while not benefiting your business credit score.

Should I use a personal loan for my business?

Business owners may prefer a personal loan over a business loan because the process is faster and often more convenient than applying for a business loan. When applying for a personal loan, lenders review your credit score and income, and there’s generally little documentation needed other than a few paystubs and identification.

FICO credit score requirements are similar between personal and business loans. With personal loans, the minimum credit score requirement is often 610, but you can secure a personal loan with a lower score. For example, if your credit score is 580, lenders like Upgrade and Avant may approve your loan application.

By comparison, credit score requirements for business loans start in the mid-500s. But if you want the highest odds of approval and the best interest rate, you’ll need a minimum credit score in the 700s.

But personal lenders largely care only about your personal creditworthiness. Business lenders set minimums around your business’s age and revenue, and they may also want to know that you have experience in your company’s industry.

That means that a personal loan may be far easier to qualify for if you’re launching a new business or a business in a field where you have little prior experience.

Keep in mind personal loan limits are typically lower than business loans. Depending on the industry you’re in, the cost of starting a business can exceed your loan amount, so this is something to consider when deciding if you should use a personal loan for business purposes.

Pros to using a personal loan for business

Here are the pros of using a personal loan for business purposes.

• Lenient lending requirements: Compared to business loans, personal loans are easier to qualify for because lenders won’t scrutinize your previous business experience, your company’s finances or how long it’s been open.
• No collateral required: Unsecured personal loans don’t require collateral, so you are not risking any personal assets. Most personal loans are unsecured, whereas unsecured business loans can be difficult to qualify for.
•  Fast funding: Many personal loan lenders offer same-day funding, so borrowers can quickly handle business expenses.
• Reasonable repayment terms: Repayment terms for personal loans can range from two to 10 years.

Cons to using a personal loan for business

Here are the cons of using a personal loan for business purposes.

• Low borrowing limits: Depending on the lender, personal loan amounts are capped at $100,000, while business loan amounts can reach $5 million.
• High interest rate: Personal loan interest rates range from 6 percent to 36 percent, but the average rate is 10.82 percent. The median fixed interest rate for business loans is just 6.44 percent.
• No impact on business credit: Payment history for the personal loan has no impact on your business credit. That could be a good thing if you miss payments, but it’s a bad thing if you want to improve your business credit.
• Personal credit score is at risk: Late or missed payments can lower your personal credit and prevent you from getting approved for other types of personal credit, such as credit cards and auto loans.

Alternatives to personal loans for businesses

A personal loan may seem like the perfect choice, but it’s smart to consider what other funding options align with your business’s needs and goals. Alternatives to personal loans for businesses include business loans, business credit cards and crowdfunding.

Business loans

Business loans can be used for all kinds of business expenses, including equipment, real estate, inventory and supplies. Some lenders are just as lenient as personal loan lenders with their requirements. They work with various businesses and credit profiles, meaning business owners could secure bad credit or startup business loans.

For example, Credibly’s working capital business loan requires a minimum credit score of 550, ranges from $25,100 to $400,000 and can be used for hiring, payroll, marketing and other immediate business expenses.

Triton Capital also offers business loans from $10,000 to $500,000 that can be used for business needs including purchasing equipment. The lender states it works with startups. As with all loans, the better the credit score, the better the interest rate.

Business credit card

Business credit cards function like personal credit cards, but they are restricted to business purchases. You can spend up to your credit limit, and each time you repay what you’ve borrowed, the credit line refreshes.

Unlike some business loans, you don’t need a formal business structure to apply and qualify. And on-time payments will help build your business credit score.

Since a personal guarantee may be required for a business credit card, if you can’t keep up with credit card payments, you are risking your personal assets.

Crowdfunding

Instead of borrowing money, try crowdfunding, which allows businesses to acquire capital through donations. Unlike a personal loan, crowdfunding doesn’t require an application or credit check. You use a fundraising platform, such as GoFundMe or Indiegogo, to launch an online campaign and collect monetary pledges that can be used to launch a business, product or project.

You can choose between four types of crowdfunding — donation, debt, equity and reward — but if you want to avoid having to repay the funds donated or guarantee donors equity in your company, opt for reward or donation-based crowdfunding.

Unfortunately, crowdfunding doesn’t guarantee a specific amount, and depending on the platform, there may be fees.