Using Personal Loans for Business Purchases: Pros and Cons

There are many times along the journey as an entrepreneur where the shortcomings of available funding can throw a wrench into your goals.

For instance, mobile repair businesses need to be ‘mobile’. Vehicles are expensive, and it’s hard to expand such a business without purchasing more vehicles and additional staff.

Taking personal loans for business purchases

Investment opportunities come up all the time for those who are networking savvy. They often require a significant amount of cash to secure. Not to mention, sometimes an essential piece of equipment can break down suddenly, requiring thousands, or even tens of thousands in repair funds.

When there’s no money in the bank for these and other purchases, it becomes necessary to consider taking out a loan.

When friends and family aren’t available, and there’s no time to seek out investors, the choice will always come down to applying for a business loan — which can be difficult or impossible for some people to get — or considering a personal loan through a reputable lender.

Following are a few pros and a few cons that come with using a personal loan to make purchases for your business.

3 Pros of using a personal loan to fund your business

1. Easier acceptance

Whether you’re established yet or not, it takes time to build a business credit rating. Without a cosigner, it’s going to be very difficult to get a business loan from a traditional lender.

Most want to see a business plan, income statements, financial projections, and a financial track record showing you can take on debt and pay it back on time.

A personal loan, offered on lending websites like, can be easier to get, if you have an established personal credit rating, making this route perhaps the only available option when your business needs funds fast.

2. Zero collateral

If you have sufficient credit and a good relationship with the lender, personal loans can be had without putting up collateral. This type of loan is known as “unsecured.”

The majority of lenders offer “secured” business loans. A secured business loan will require you sign over business equipment and property, or your own personal property to protect against a failure to pay the loan back.

A personal loan provides a huge advantage if you don’t have any property to put up, and don’t wish to pester friends and relatives to cosign on your loans for you.

3. Fewer penalties

For a variety of reasons, reasons which benefit the lender, they’ll often gouge you if you choose to pay down your balance on a business loan faster. Business loans often come with penalties that personal loans do not.

Considering interest rates coming in south of 5% with a short or long term business loan, it should be obvious that lenders want you to pay that interest over the entire term in order to profit from the loan.

A personal loan will allow you to pay off the balance whenever you like, including other savings if you set up prepayment methods with the lender, and other incentives that make them more comfortable giving you the loan at the time of signing.

Funding business purchases

3 Cons of using a personal loan to fund your business

1. Lending limits

Anyone who has ever been denied a new car loan has felt this reality. Lenders aren’t terribly excited about parting ways with big dollars unless offered collateral with value and quick sale-ability.

In fact, the minimum amount a lender will give you on a business loan (let’s say $5,000 for example) is often the maximum most smaller lenders will offer on a personal loan. These terms vary, and are dependent on the lender and your credit score

Consider that a small or medium-sized business rarely considers taking out a loan unless they need an expensive piece of equipment, property, etc. In most situations where money is needed to make a significant business purchase, the personal loan amounts offered by lenders are rarely helpful.

2. Profit gouging

Personal loans are very likely to gouge into much-needed profits via higher interest. Interest rates can be cut in half when you’re approved for a business loan, particularly with the SBA.

When you’re borrowing tens of thousands of dollars, every percentage point paid in interest results in big bucks over the life of a loan. On the other hand, an 8% interest rate on a personal loan is pretty darned good if you’re borrowing a few thousand dollars for a used car, boat, or ATV.

Going the personal loan route, you could end up spending multiple thousands of dollars in lost revenue paid toward the balance of the loan, rather than using it to expand operations, make other advancements in the business, or pay outstanding bills.

3. Repayment terms

It was stated earlier that personal loans offer significant advantages such as the ability to repay the loan whenever you like without penalties. However, this isn’t much of an advantage if you’re a small business that needs a $50,000 or higher loan.

The future is still yet to be written for your growing business, and you may not have the foreseeable capacity to pay down that balance, plus interest, in the short time offered by the lender. Personal loans typically cap out at a 7 year (max) repayment window.

Business loans can be similar, depending on the type and the lender. However, low interest business loans are available to qualified business owners that extend the repayment window to as much as 25 years in some cases.

Which option is right for you?

All I can do is give you the facts:

  • If you qualify for a lower-interest business loan, and are comfortable with the lender’s terms, that’s likely to be your best option.
  • On the other hand, if your back is up against the wall in some shape or form, and a personal loan feels like your best option, go for it.

Whichever you decide to choose, always compare several lenders. While less shady types are increasingly harder to find as the FTC cracks down and passes more and more rules, different lenders will offer different options.

And, those options could mean all the difference to a small growing business in need of fast cash!


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