Using a personal loan for business expenses: What to consider

You can use personal loans to finance virtually anything, such as 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 may be a faster and more convenient option than applying for a business loan through a traditional bank or credit union.

While an unsecured personal loan can provide fast access to cash for your business at a good interest rate, you should always review the associated benefits and risks of any loan option, including using a personal loan for business purposes.

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Benefits of using a personal loan for business expenses

A personal loan may be a valuable option to finance business expenses because they deliver the following advantages:

1. Getting a personal loan is easier than a business loan
2. Funds may be disbursed into your account quickly
3. No collateral 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 typically determines your eligibility by looking at your business revenue, your length of time in business and your personal credit score. You may have a hard time getting a business loan if you’re a new business owner with no history of running a company.

By contrast, underwriters for personal loans will qualify you for a loan based primarily on your credit score and income. That means you can include other sources of income – such as another job or rental income – on your loan application.

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2. Funds may be disbursed into your account quickly

Personal loans may be your best option if you need capital quickly, as lenders typically disperse personal loans within a few days of approval.

But with a Small Business Administration (SBA) loan – one of the most popular forms of business funding – you could be waiting for several weeks or even months before gaining access to your funds.

If you're interested in getting a personal loan, check out Credible to find reputable lenders that can fund your loan quickly and for large amounts.

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3. No collateral is required

Most business loans are secured, which means the lender will likely ask you to offer up assets like business inventory as collateral. If you fail to make your payments, the bank can seize your collateral.

Personal loans, however, are typically unsecured, meaning they don’t require collateral. If you fall behind on your payments, your credit may take a hit but the lender can’t touch your assets.

Risks of using a personal loan for business expenses

Before you sign up for a personal loan (or any financial product), you should take into account the associated risks, such as these below:

1. Personal loan interest rates tend to be high
2. Personal loans put your personal credit on the line
3. Interest may not be tax-deductible

1. Personal loan interest rates tend to be high

According to Credible, you could pay between 4.99% and 36% APR for a personal loan depending on your credit score and other criteria. If your credit score is less than stellar, or if a lender deems your income to be low, you may only qualify for a high-interest personal loan.

On the other hand, 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 expose your own credit to potential risks. For example, if your business fails or you fall behind on your payments, your credit score could take a significant hit, making it difficult to qualify for other types of credit, including mortgages and car loans.

3. Interest may not be tax-deductible

Generally speaking, you can’t 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’re able to show all the proceeds from your personal loan are for legitimate business expenses, you can deduct all the interest payments. However, if you commingle your loan proceeds with both business and personal expenses, you can only deduct the amount you spend for your business, which could be challenging to document.

Should you use a personal loan to pay for business expenses?

Using a personal loan may be wise to grow your business. It may provide a faster and more convenient avenue to funding without requiring you to put up collateral. Of course, you should do your due diligence and weigh all the benefits and risks as they pertain to your situation.

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