Using a personal loan for business expenses: what to consider
You can use personal loans to finance just about anything, like a vacation, a new car, or a home improvement project. You can even use personal loans to start a new business or pay for business expenses. In fact, online personal loans can be a faster and more convenient option than applying for a business loan from a traditional bank or credit union.
While an unsecured personal loan can provide quick access to cash for your business at a good interest rate, you should always consider the benefits and risks associated with any loan option, including the use of a personal loan for business purposes.
If you are considering getting a personal loan to finance your business, visit an online marketplace like Credible to compare the best rates and lenders available.
PERSONAL LOAN VS. CREDIT CARD – WHEN TO USE EACH
Benefits of using a personal loan for business expenses
A personal loan can be an interesting option to finance business expenses because it offers the following advantages:
- Getting a personal loan is easier than a business loan
- Funds can be transferred quickly to your account
- No guarantee is required
1. Getting a personal loan is easier than a business loan
If your business is still in its infancy, you may find it easier to qualify for a personal loan than a business loan. With a business loan, the lender usually determines your eligibility by looking at your business income, the length of your activity, and your personal credit score. You might have a hard time getting a business loan if you are a new business owner with no background in business management.
In contrast, personal loan underwriters will qualify you for a loan based primarily on your credit score and income. This means that you can include other sources of income – such as other employment or rental income – on your loan application.
Visit Credible to see if you qualify for a personal loan without affecting your credit score.
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2. Funds can be transferred quickly to your account
Personal loans can be your best option if you need capital quickly, as lenders typically disperse personal loans within days of approval.
But with a Small Business Administration (SBA) loan – one of the most popular forms of business financing – you could wait several weeks or even months before you can access your funds.
If you want to get a personal loan, check out Credible to find reputable lenders who can fund your loan quickly and for large amounts.
Unsecured loans: all you need to know
3. No warranty is required
Most business loans are secured, which means the lender will likely ask you to offer assets like business inventory as collateral. If you don’t make your payments, the bank can seize your collateral.
However, personal loans are generally unsecured, which means that they do not require collateral. If you fall behind on your payments, your credit may take a hit, but the lender can’t touch your assets.
Risks associated with using a personal loan for business expenses
Before taking out a personal loan (or any financial product), you should consider the associated risks, such as these below:
- Personal loan interest rates tend to be high
- Personal loans put your personal credit on the line
- Interest may not be tax deductible
1. Interest rates on personal loans tend to be high
According to Credible, you could pay between 4.99% and 36% APR on a personal loan depending on your credit score and other criteria. If your credit score is less than stellar, or if a lender considers your income to be low, you may only be eligible for a high interest personal loan.
In contrast, business loans have average interest rates between 2.58% and 7.16% at financial institutions, according to recent data from the Federal Reserve.
2. Personal loans put your personal credit on the line
When you get a personal loan for your business, you put your own credit at risk. For example, if your business goes bankrupt or you fall behind on your payments, your credit rating could be significantly impacted, making it difficult to qualify for other types of credit, including mortgages and auto loans.
3. Interest may not be tax deductible
Generally speaking, you cannot get a tax credit for your interest payments on a personal loan like you can with a business loan.
But with proper documentation, you may be able to deduct some or all of your interest payments on your personal loan.
If you can show that all of your personal loan proceeds are for legitimate business expenses, you can deduct all interest payments. However, if you mix your loan proceeds with business and personal expenses, you can only deduct the amount you spend on your business, which might be difficult to document.
Should you use a personal loan to pay for business expenses?
Using a personal loan can be a good idea to grow your business. It can provide a faster and more convenient way to finance without requiring you to post collateral. Of course, you need to do your due diligence and weigh all the benefits and risks that come with your situation.
Before signing your name on the dotted line, make sure you are getting the lowest rates and best terms available by comparing offers from multiple lenders at once on Credible, where experienced loan officers can answer all your questions. Questions.
PERSONAL LOANS: EVERYTHING YOU NEED TO KNOW
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