Can You Use a Personal Loan to Launch a Business? Yes. Here’s How.

If you have your heart set on becoming a business owner or founder, then one of your first steps is securing financing. You cannot use your credit card, unfortunately. What you can do, though, is take out a personal loan. You’ve probably seen ads and websites about personal loans. Did you know you can use a personal loan for financing the birth of your company? Well, you can—and it’s worth considering.

Yes, you can use a personal loan for your business needs  

The thought of using a personal loan in order to establish a business may seem counterintuitive. Personal loans are often used to help finance weddings, vacations and medical emergencies—items with specific line items and costs. While it’s true that this type of loan is offered for a variety of reasons, its main function is to provide borrowers a way to meet their financial goals. What do you say to the bank when applying for a personal loan that you intend to use for your startup? You tell the truth. The financial institution is not going to refuse your application—though it may refuse to loan you money if you can’t provide some proof of fiscal responsibility.

What is the difference between a personal loan and a business loan?

A business loan and a personal loan are similar in that both financing options are intended to help consumers cover costs. The similarities end there. A business loan is a secured credit product that is obtained for business purposes, requiring collateral like real estate. It’s typically for high values, which is particularly useful if you’re setting up a company. After all, you’ll need cash long after your initial launch.  You’ll probably need cash until the business becomes profitable.

A personal loan, on the other hand, is an unsecured credit product that is meant to help borrowers meet their current needs. You may not be required to put up your home as a guarantee. It depends mainly on the bank. As for the sum of money that you can borrow, it is significantly lower, but not negligible. Personal loans can be particularly helpful if you have not actually started providing services or established your company. Unlike business loans, they don’t require proof of a reputable, thriving organization.

Learn how to protect yourself

You’ll likely be using your own assets in order to secure the personal loan, and that means greater risk. When you borrow against your assets, you risk losing them if you fail to make the payments. You’ll need to protect yourself. One way to approach this: Make the financing agreement restrictive. In other words, make it clear that certain assets are off the table. Borrow only as much money as you can reasonably afford to pay back. It’s true that you will need capital every step of the way, but you do not know how much money you can make.

Read more about startup financing, raising capital and real-life lessons from entrepreneurs from other Octane blogs about loans.