Can I use a personal loan to start a business?

20 May 2022

You’ve got ambition, a vision and a solid business plan, and now you need some funding to get your venture off the ground. There are many ways to fund a new business - from bootstrapping to getting a government-backed startup loan. But is it also possible to use a personal loan to start a business? Let’s find out.

Personal Bus Hero

Although there are many business finance types to choose from today, you might be able to use a personal loan to start a business. Some new business owners may prefer this option if they cannot get business finance due to their limited trading history. 

Of course, there are other ways to fund a new business. You could explore angel and venture capital investment, for instance. You could also look at crowdfunding, and if you have enough savings set aside, you might decide to bootstrap your business. 

It’s worth bearing in mind that some business finance lenders are willing to lend to startups. You can use Funding Options to see what you could be eligible for.

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Personal loan considerations 

There are a few things to consider if you decide to go down the personal loan route.

For instance, you’ll need to determine whether or not the personal loan you’re applying for has any restrictions for business use. Some personal loans can be used for commercial purposes, but some can’t. Be sure to read the terms and conditions of the loan and always be honest to the lender about your intentions. 

When you take out a personal loan, the lender will check your eligibility based on your credit score and financial circumstances. 

One key thing to remember is that you’ll be personally liable for paying back the loan amount plus interest - even if your business fails to get off the ground. If this happens, could you afford the repayments?

To qualify for a personal loan, you’ll have to provide evidence of a regular income and have an excellent personal credit score. 

Some personal loans for bad credit out there; however, they tend to come with higher interest rates. Also, you might not be permitted to use a personal loan for business purposes if you have bad credit. 

What is the government-backed Start Up Loan?

A Startup Loan is a personal loan designed for people looking to start a business or grow an existing one. Businesses that have been trading for less than 36 months can apply. Each owner or partner in the company can apply for between £500 and £25,000, and a total of £100,000 is available per business. 

Startup Loans have a fixed interest rate of 6% per annum, and loan terms range from one to five years. It’s important to note that this type of finance isn’t a grant - you’ll be expected to repay the total amount - with interest - in the agreed period. 

Secured finance requires the borrower to offer security in the form of assets or a personal guarantee. But because Start Up Loans are unsecured, you shouldn’t have to provide any security. You’ll have to show a robust business plan and cash flow forecast. 

As well as finance for your business, you get access to a year’s worth of free mentoring and a variety of business offers. 

You could use the loan for:

  • Equipment and stock

  • A premises

  • Marketing and promotional expenses

  • A range of other business-related expenses

Could you leverage business finance instead?

There are lots of business finance options on the table today. Some of today’s innovative lenders will also consider lending to startups with short trading and credit histories. 

If you’re looking for a source of short-term finance for your business, business credit cards could be worth a look. Credit cards can provide your startup with the quick cash injection it needs to fund expenses or boost cash flow. Some business credit cards come with limited-time offers such as 0% interest, air miles or cashback incentives. 

You might be eligible for a merchant cash advance if you’ve started a retail business (or another type of company that deals with customer card payments). The lender will provide you with the finance amount, and you’ll pay it back through a percentage of your customer card payments. Instead of repaying a set amount every month, repayments flex in line with how much trade you’re doing.

As always, comparing lenders and different funding options is crucial, and you can use Funding Options to do this. Tell us how much money you need, how you intend to use it and how quickly you need it, and our technology will explore 120+ lenders for you. 

It’s free to apply, and it doesn’t affect your credit score.

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Joe Morley
Joe Morley

Head of Unsecured Lending

Joe has worked in the alternative lending space since 2015. During this time he has helped hundreds of SMEs access millions in essential funding ranging from long-term asset-backed lending to short-term unsecured revolving credit lines and beyond. In his role, Joe manages and supports a large team of Credit Finance specialists.

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