One of the biggest challenges to starting a small business is finding the funding to do so. According to recent reports, over half of new businesses have trouble with credit availability or accessing funds for expansion. If you own a new or small business, what can you do to obtain a loan without a substantial business history? Obtaining a personal business loan may be the option for you.

What is a personal business loan?

As the name suggests, a personal business loan is a personal loan used for business purposes, including inventory purchases, payroll, or marketing initiatives. For new or small businesses, personal business loans may be the ideal route for funding because it can be difficult to obtain a loan with little to no operating history. With no established track record to refer to, approval for a personal business loan is based on your personal financial history instead.

Personal business loans can be obtained through banks, credit unions, and online lenders. They are often offered as term loans, which means you may borrow a lump sum upfront and are required to repay a specified amount at regular intervals over a set period of time. Personal business loans are often repaid in monthly installments.

As a small business owner, it is important not to mistake a personal business loan with a standard personal loan. Carefully review the terms of your contract, which will indicate whether the funds can be used for business purposes.

When should you use a personal business loan?

It may be impossible for new or small businesses to obtain other forms of business loans because approval for those loans depends on the financial history of the business. This is why personal business loans are often utilized by those who want to kickstart their new business. 

Additionally, personal business loans are ideal for those who do not have collateral to offer for the loan, which is a requirement for many other forms of business loans. New and small businesses are also more likely to be in this situation.

Finally, personal business loans are an ideal consideration for businesses that need a small loan amount. It is possible to obtain a short-term business loan for this purpose, but these loans have incredibly high interest rates and are often used for unexpected emergencies. If your personal financial history is strong, and you’re looking for a small loan amount without high interest rates, it would be wise to consider a personal business loan. 

What are the benefits of a personal business loan?

Personal business loans are an important consideration for any business. The primary benefits of a personal business loan are:

• Easy qualifications. Business loans can be difficult to obtain—especially for startups and new businesses that do not have adequate proof of their business performance. Personal business loans are based solely on your personal credit score, income, and financial background. As long as you have a good credit score and a reliable source of income, you may qualify for a personal business loan even if you were denied a traditional business loan. In general, applying for a personal business loan requires much less documentation than traditional business loans.
  
• Favorable terms. If your personal financial history is strong, you will likely receive even more favorable terms than a traditional business loan and lower annual percentage rates than credit cards. Additionally, your personal business loan will likely have a fixed payment schedule with long repayment terms. A fixed schedule negates the possibility of accumulating debt due to interest.
  
• Quick access to funding. Many small businesses apply for a Small Business Administration (SBA) loan for funding. However, this application process can take as little as a few weeks or as long as a few months. This length of time can severely impact businesses that are in dire need of funding or want to begin their business quickly. If a long wait for funding is not suitable for your needs, personal business loans may be the better option for you since lenders can release personal loans in a matter of days.
  
• No collateral requirements. Unlike other business loans (such as term loans and equipment loans), most personal business loans do not require you to offer collateral for the agreement. It is important to note that although your lender cannot seize your assets if you do not offer collateral, being delinquent with your personal business loan can drastically affect your personal credit score.
  
• More control over funding. Unlike other business loans that may have more strict terms in the agreement and can only be applied toward specific expenses, the funding you obtain from a personal business loan can be used at your discretion. You have control over how much of your loan goes into day-to-day expenses, office supplies, etc.

What are the drawbacks of a personal business loan?

Before committing to a personal business loan, review the following considerations: 

• High risk for your credit score. There is a higher level of personal risk involved with personal business loans. Falling behind on payments can severely damage your personal credit score, making it more difficult to obtain other forms of loans.
  
• No business credit. Although the funds from a personal business loan will be used towards your business, the loan will not help you build your business credit score the way other business loans would. If your business credit score remains low, it will be difficult to obtain other forms of business loans in the future.
  
• Smaller loan amount. The amount available in a personal business loan is often much smaller than other forms of business loans. You may be unable to rely on this loan completely to cover all your business expenses.
  
• Potentially high interest rates. The terms of your personal business loan depend on your personal financial history. If you have a bad credit score and a low salary, you may find your interest rate set significantly high. 

Expert Commentary

Ahmad Shafique is the President of Advantage CDC, a private not-for-profit corporation licensed and certified by the U.S. Small Business Administration to provide low-cost, long-term SBA loans to assist eligible small businesses in California. Ahmad provided answers and advice for business owners considering a personal business loan. 

If an individual has poor financial history, how do they get a personal business loan?

Fix your credit first! If your personal financial history is not great, then collateral or a co-borrower could be considered. However, the personal financial history of the key person is critical. 

How does a personal business loan affect your credit score if you are delinquent on the loan?

Credit agencies do not pay as much attention to business loan defaults as they do to mortgages, car loans, and credit card debt. However, if a borrower becomes delinquent on a business loan, it will severely hamper their ability to obtain another business loan in the near future.

What do people tend to overlook when they consider a personal business loan?

File your tax returns as accurately as possible. Accountants try to shine in front of you by saving you money on your tax payment, but they do that by including many expenses—mostly personal expenses on the business side. 

This results in tax savings, but it also results in lower cash flow to repay your loan. Therefore, people shoot themselves in the foot by going along with a tax preparer’s advice of saving money this way.

What advice do you have for small businesses considering this loan?

Before applying for a personal business loan, analyze the best-case scenario and worst-case scenario for your business. Until you do that, you will not be able to decide based on calculated risk.

Also, don’t follow others! Don’t start a business because your friend or family is doing well in that line of business. Start a business in an industry that you know best and are passionate about.

Final Word

Obtaining funding for your business can be difficult—especially if you are beginning a new or small business. It is important to consider all of your options, but without a history of operations, many traditional business loans will be unobtainable. A personal business loan can assist you in your endeavors by focusing on your personal financial history. Although you carry a larger personal risk, if you are able to make your monthly payments on time, a personal business loan may be exactly what you need to obtain the funds to kickstart your business.

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