A personal business loan is a loan from the bank that has been given to an individual who doesn’t qualify for other types of business financing.
When planning to start up a business, the owner will have plenty of stressors to get through. They will need to know about outsourcing materials, marketing tactics, and much more.
However, none of this matters if the business owner doesn’t know how they’re going to finance the startup of their business. There are options to consider from banks, credit unions, online lenders, and personal loans from friends and family.
There are benefits and drawbacks to all of these types of finance for your business, which you’ll need to look at on your own to see if any are best for your business.
If none of these seem right for your business, or you do not qualify for these types of finance, all hope is not lost. There is the option for an unsecured personal loan, otherwise known as a personal business loan.
A personal loan is taken out from a bank, credit union, or online lender and can be used for a number of different purposes. You don’t just need to use the money for starting a business, although that’s what many people do use it for.
Most personal loans aren’t secured, meaning that you don’t need to put up any collateral to qualify for the money.
This is one of the reasons why personal business loans are so popular and highly sought after, as many people wanting to start up a new business don’t have enough assets to put up as collateral.
Personal business loans also don’t require you to pay them back in fixed monthly payments, and they give you somewhere between two and five years to pay the money back.
This sounds ideal for new business owners who don’t know how long it will take for them to get their business off of the ground.
Just make sure that your lender has no restrictions of fine print that disallows you from using the personal loan for your business. Otherwise, you might find yourself breaking contractual agreements which could land you in some serious trouble.
Benefits of a personal business loan include more flexibility to use your funds as and when you please, for different areas of the business such as marketing, equipment, product development, outsourcing suppliers, and much more.
The APRs will often be lower and personal loans tend to be easier to obtain than business loans.
With that being said, there are also drawbacks of using a personal loan for your business startup costs. For starters, you won’t earn any tax credits for your interest payments which you would get with a business loan.
The loan is also more likely to be less significant in size, giving you less budget to start your business on and therefore offering it a smaller push due to having less money behind it.
If your personal loan is secured, your personal assets might be at risk if you fail on the repayments rather than those of the business.
Can you use a business loan for personal use?
If you do choose to opt for a business loan, the terms and conditions will traditionally be laid out to accommodate a business. With so much money being at your fingertips, it can be tempting to use it for your personal needs rather than putting it all into the business. But is this allowed?
Unfortunately, there is no clear answer to this question as the answer will depend on how you’ve set up your business as well as the lender you are using.
The structure of your business can be one of many - sole trader, partnership, trust, or company. If your business is structured as a company, you cannot use the business loan for personal expenditure.
This is due to the fact that the company is its own legal entity, meaning you cannot use any of its funds for personal use other than the salary you pay yourself.
On the other hand, if your business is structured as a sole trader without any employees, you can use the business loan for personal use. This is because the business is not its own legal entity. From a legal point of view, the business loan can be used for personal business.
However, some lenders are not happy with this legality if you declare that you are going to be using the money for one reason, but use it for another purpose. Due to this, they might include a clause in your contract that states the money can only be used for business purposes.
Due to this, many people remain confused as to whether a business loan can be used for personal reasons or not. The best thing to do is to keep your business and personal finances separate from one another so that you remain out of trouble.
Using your loan for the wrong purpose could get you into a lot of trouble, so we think that the best option is to not even think about using the business loan for anything other than the business itself.
However, if you’re really struggling with personal finance, it can be difficult to follow this rule.
So, if your business is structured as a sole trader and you are considering using the money for personal reasons, make sure that you read your contract carefully, multiple times to protect yourself from getting into trouble with the lender.
Is it easier to get a personal or business loan?
It’s a well-known fact that business loans require you to match a checklist of criteria to ensure that you’re eligible for the loan. You’ll need to pass a credit check as well as a number of other affordability factors.
Some startup businesses find it troublesome to secure a loan when they have a lack of track record or credit history to show the lenders. The trouble is that they cannot gain this without funding, but they cannot access funding without proof that they can pay the money back.
However, there are business loans available for startup businesses so it is not completely unachievable for you to obtain. These tend to be easily accessible for new businesses and entrepreneurs.
Personal loans tend to be much easier to qualify for than business loans. A lender will look at your credit score and income before determining whether you qualify for their loan. This allows you to include more sources of income on your application, such as a 9-to-5 job or property investment.
These additional sources of income might make the lender more likely to offer you the loan that you’re looking for. You can argue that the personal loan is to supplement your business income rather than being just used for the business itself.
The reason why you might need to have a workaround is that some lenders don’t want to offer you a loan that is going to be used for business purposes when the terms specify that it is for personal use. This is the same for business loans being used for personal use.
Due to this, if you’re opting for a personal loan for business reasons, it’s best to let your lender know beforehand so that you can avoid any legal issues in the future.
As we said before, we believe that it’s best to keep your personal and business finances separate to avoid any issues down the road, but it’s ultimately up to you how much you want to cross this line.
To sum up, a personal loan is easier to obtain because you only have to show the lender your credit history and income, which can be accumulated from numerous different sources to make it look more impressive.
On the other hand, a business loan might require you to show the lender lots more information about the business such as reports on how the business is running.
If you don’t have sufficient data, you’ll find it much harder to obtain a business loan and might even be rejected from your application.
Despite this, there is a startup business loan that you can opt for which seems to be no harder to obtain than a personal loan.
If you’re a startup business, you might even find it easier to apply for the startup business loan than the personal loan as you won’t need to prove to the lender what you’re using the money for.