Many business owners occasionally need funding to help cover expenses or weather a temporary cash flow shortage. But some small-business lenders have minimum loan amounts that might be far greater than your needs.
Personal loans can be an option when you just need to borrow a small amount to cover business expenses. Here’s what you should know about small-business loans.
Credible makes it easy to see your prequalified personal loan rates from various lenders, all in one place.
- Business loans vs. personal loans
- Should you use a personal loan to fund business expenses?
- Alternatives to small-business loans
Business and personal loans come in a wide range of loan types with different limits, terms, and interest rates.
Business loans are a form of credit that lenders offer to businesses. While the requirements vary by lender, some standard ones include:
- Business and personal credit check — Many small-business lenders will check both your business and personal credit as part of the loan underwriting process. Lenders are more likely to approve loans for small-business owners with good credit — usually defined as a FICO Score of 670 or above — and offer them more favorable rates and terms.
- Minimum years in business — Many small-business lenders don’t loan money to new startups. They might require you to be in business for at least two years before approving your loan application.
- Business plan and financials — You’ll likely have to provide the lender a detailed business plan, financial statements, and copies of your business and personal tax returns before your loan application is approved. Lenders use this information to determine whether you have the cash flow to repay the loan.
- Collateral — Not all small-business lenders require collateral, but some do. If your business has receivables, real estate, equipment, or other valuable assets, putting it up as security on the loan can improve your chances of getting approved and help you qualify for a lower rate.
Maximum loan amounts and terms vary by lender, but SBA 7(a) loans have a maximum amount of $5 million, and most loans mature within five to 10 years — 25 years for loans used to purchase real estate.
A personal loan is a form of credit available to individuals that typically must be repaid within one to seven years. Most personal loans are unsecured, so you don’t need collateral to get approved for one.
Like business loans, personal loan requirements vary by lender but generally include:
- Good credit — Personal loan lenders will likely check your personal credit score as part of the loan underwriting process. Minimum credit scores vary by lender, but borrowers with good credit are more likely to qualify for a loan and get the lowest interest rates.
- Income verification — Lenders want assurance that you have enough income to make the monthly payments. To verify your income, they may require copies of pay stubs, bank statements, tax returns, and your employer’s contact information so they can call to verify your income.
- Debt-to-income (DTI) ratio — Lenders may also look at how much debt you have compared to your income. They do this by calculating your debt-to-income ratio, which is your total monthly debt payments divided by your gross monthly income, expressed as a percentage. Lenders usually require a DTI ratio under 40%.
The maximum amount you can borrow with a personal loan depends on the lender, but some lenders will loan up to $100,000.
Visit Credible to compare personal loan rates from various lenders, without affecting your credit.
You may be able to use a personal loan to cover business expenses. Compared to business loans, personal loans tend to offer faster funding and a much easier application process. In fact, you may be able to qualify for a personal loan even if you’re just starting the business and don’t have a business credit score or any business assets.
But that doesn’t mean a personal loan to fund business expenses is always the wisest move.
When you take out a personal loan, you’re personally responsible for repaying the loan. If the business goes under and you can’t afford to repay the loan, your personal credit score could take a hit, making it tough to get a credit card, a mortgage, or a car loan. And even if you can afford to make the loan payments from your personal funds, you’ll be paying on a loan for a business that no longer exists.
For this reason, you should only use a personal loan for small-business expenses when you’re confident that your business has solid revenues and enough cash flow to repay the loan as agreed.
Consider these alternatives if you’re having trouble securing financing for your small business:
- SBA loans — The federal government partially guarantees SBA loans. This guarantee reduces risk for the lender and can improve your chances of getting approved. The U.S. Small Business Administration also caps the interest rate SBA lenders can charge, making them more affordable.
- Business credit card — A small-business credit card can be convenient for covering unexpected business expenses and meeting short-term funding needs. Many business credit cards also offer perks, such as cash back or points you can redeem for things like travel, online shopping, and gift cards.
- Equipment financing — If you need funding to purchase business equipment, consider equipment financing rather than a personal loan. Equipment financing is usually less expensive since it’s secured by the equipment itself.
- Merchant cash advance — If your business processes a lot of credit card payments, you may qualify for a merchant cash advance. You repay this type of loan by authorizing the merchant cash advance company to take a percentage of each day’s credit card sales.
If you’ve weighed your options and decided a personal loan is right for you, Credible makes it easy to compare personal loan rates to find one that best suits your needs.