Personal loans for small businesses: what you need to know

Financial Services


Our goal here at Credible Operations, Inc., NMLS number 1681276, referred to as “Credible” below, is to give you the tools and confidence you need to improve your finances. Although we promote the products of our partner lenders who pay us for our services, all opinions are ours.

Personal loans allow you to start or grow your business and are a great option if you don’t qualify for a small business loan. (iStock)

If you don’t follow the strict rules and eligibility requirements that banks put in place for a business loan, a personal loan can help you receive the funds you need to run your small business. Personal loans are generally unsecured, which means they don’t require collateral – so you are responsible for repaying the loan through monthly payments.

If the lender has no restrictions on using a personal loan for business purposes, you can use it to purchase office equipment or supplies, run a marketing campaign, or for any other need you want. business needs.

Credible makes it easy to compare the personal loan rates of several lenders.

Use a personal loan for your small business

It may be a good idea to use a personal loan for your small business if your needs are straightforward. For example, if you have a new business without a long credit history or want to make a quick loan decision, a personal loan may be the way to go.

Many entrepreneurs who started new businesses or ancillary activities during the pandemic may take advantage of personal loans – rather than business loans – because business loans typically require a long history of operations.

Personal loans are a good source of financing for small amounts. The average personal loan balance in 2020 was $ 16,458, according to Experian. In contrast, the average loan amount approved by the Small Business Administration was $ 533,075 in fiscal 2020, according to data from the Federal Reserve.

Many lenders prohibit borrowers from using personal business loans, but these credible partner lenders allow it.

Why you should use a personal loan for your business

As long as your lender doesn’t place restrictions on the use of personal loan funds for your business, a personal loan can be meaningful for your business because it has many benefits.

  • Quick financing – With strong credit, you can access your loan funds within one to two business days. However, it may take a month or more before you can access your funds with a Small Business Administration loan.
  • Qualifications are based on you, not your business – If you have a good or an excellent personal credit score, it will be easier to take out a personal loan. While business loan underwriters typically look at your business’ income and business history, you qualify for a personal loan based on your individual credit history.
  • No collateral required – Most business loans are secured by collateral, which is personal property, such as a house. On the other hand, personal loans are generally unsecured which means that you will not have to post collateral to qualify for the loan. Your main obligation is to make your payments on time.
  • Flexibility – You can use a personal loan for a business for any reason, such as marketing expenses, office supplies, inventory, or for any other purpose.
  • Low rates – The interest rates of personal loans are generally lower than those of other sources of finance. For example, credit cards have much higher interest rates. The average interest rate for personal loans was 9.58% in May 2021, while the average rate for credit cards with interest assessed was 16.30%, according to data from the Federal Reserve.

With such advantages, personal loans can be a great option for small business owners. Let Credible help you compare personal loan rates from various lenders.

Risks of using a personal loan for your business

Personal loans are a quick and flexible way to pay for your business financial needs, including payroll, inventory, and vendor expenses. But they have drawbacks.

  • Small loan amounts – Since personal loans are usually for smaller amounts, a business loan may be a better option if you need a large amount of money.
  • You cannot create credit for your business – If you want to obtain business loans in the future, a personal loan in your name will not help you increase your business credit score. In addition, a personal loan exposes your own credit to potential risks in the event of late payment or default.
  • May affect your personal credit – If you already have a stable income and an excellent credit rating, a personal loan will have lower annual percentage rates, or APRs. But for borrowers with bad or fair credit, a personal loan can have much higher APRs that make the loan more difficult to repay.
  • Mixing up finances can cause headaches – When using a personal loan for a business, it is easy to mix up personal and business finances which can cause problems when filing your taxes. Keep a separate business bank account for your business expenses and transactions to avoid complications.
  • May limit future funding opportunities – Taking out a large personal loan may prevent you from accessing funds for other purchases, such as a home or car loan, as lenders consider your debt-to-income ratio (DTI) to determine your eligibility for more credit. Adding a personal loan that is important to business finances could dramatically increase your DTI ratio.

Alternative financing options for small businesses

If a personal loan isn’t right for you, consider taking advantage of other small business financing options.

Here are some alternatives for obtaining financing for your business.

Small business loans

Small business loans can help you buy new equipment, expand your reach, and stock your shelves. Small business loans are generally available from traditional banks, credit unions, and online lenders. Make sure you have your business plan ready. Note that many lenders require a business to have a history of at least a year or two, and you must be able to show income.

If you can’t show your business’s income and credit history, consider a personal loan instead. With Credible, you can easily compare the rates of different lenders.

Small business grants

Many government organizations offer grants to help you start or grow your business. The main advantage of grants is that you don’t have to pay them back like you do with loans. You may have to spend a lot of time researching various grants that you are eligible for, but injecting free funds into your business is worth the extra effort. Begin your research on the Small business Administration website, which provides many tools for finding federal grants.

External investors

External investors, such as venture capitalists and angel investors, can help you start and grow your business. Many entrepreneurs benefit from the mentorship they receive from investors with expertise, connections and experience reaching the highest levels of success.

Of course, investors are looking for financial rewards, and they will often only invest in companies with a clear edge in the market. In return for their start-up loan, they will usually expect partial ownership of your business.

Business credit card

Business credit cards, especially those with a 0% APR introductory period, are a popular option for paying for business expenses. In this case, the cards can be used as an interest-free loan during the promotional period.

You’ll usually need good credit to qualify for a business credit card, and these cards usually don’t have high credit limits. Still, a business credit card can help finance your new business interest-free. Just make sure you pay off the balance in full before the promotional period ends, or you’ll start earning interest on your business purchases at the card’s regular rate.

SBA loans

SBA loans or SBA microloans can help you start or grow your business with reduced interest rates and down payments. But the SBA doesn’t make small business loans – it guarantees them through the US Small Business Administration, an agency of the federal government.

The SBA guarantees a solid range of small business loans to help business owners with varied needs. Just be aware that the application and approval process can be quite lengthy.


Many small businesses receive seed funding from crowdfunding websites. Successful crowdfunding campaigns can help you build customer contacts and collect buyer data.

Companies that offer a unique product or service are often the most successful. To gain traction and funding, you need to focus on marketing across multiple platforms. Note that crowdfunding involves many people, which can lead to unpredictable results. Experts advise getting help from an experienced partner who can foresee potential problems.


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