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Many business owners sometimes need financing to cover expenses or deal with a temporary shortage of cash. But some small business lenders have minimum loan amounts that may be well above your needs.
Personal loans can be an option when you just need to borrow a small amount to cover your business expenses. Here’s what you need to know about small business loans.
Credible, it’s easy to view your prequalified personal loan rates from various lenders, all in one place.
Business loans vs personal loans
Business loans are a form of credit that lenders provide to businesses. Although requirements vary by lender, some standard standards include:
- Professional and personal solvency investigation — 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 — generally defined as a FICO score of 670 or higher — and offer them more favorable rates and terms.
- Minimum years in business — Many small business lenders do not lend money to new startups. They may require you to be in business for at least two years before approving your loan application.
- Business plan and finances — You will likely need to provide the lender with 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 if you have the cash to repay the loan.
- Guarantee – Not all small business lenders require collateral, but some do. If your business has receivables, real estate, equipment or other valuable assets, putting it as collateral 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 must generally be repaid within one to seven years. Most personal loans are unsecured, so you don’t need collateral to get one.
As with business loans, requirements for personal loans vary by lender, but generally include:
- Good credit — Personal 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 to know 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 contact information from your employer so they can call to verify your income.
- Debt-to-income ratio (DTI) — Lenders can also compare the amount of your debt 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 generally require a DTI ratio of less than 40%.
The maximum amount you can borrow with a personal loan depends on the lender, but some lenders will lend up to $100,000.
Visit Credible for compare personal loan rates from various lenders, without affecting your credit.
Should a personal loan be used to finance professional expenses?
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 simpler application process. In fact, you might qualify for a personal loan even if you just started your business and don’t have a credit score or business assets.
But that doesn’t mean that a personal loan to finance business expenses is always the wisest decision.
When you take out a personal loan, you are personally responsible for repaying the loan. If the business goes bankrupt and you cannot afford to repay the loan, your personal credit score could take a hit, making it difficult to get a credit card, mortgage, or car loan. And even if you can afford to repay the loan with your personal funds, you will be paying 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 are sure your business has solid income and enough cash to repay the loan as agreed.
Small Business Loan Alternatives
Consider these alternatives if you are having difficulty obtaining financing for your small business:
- SBA Loans — The federal government partially guarantees SBA loans. This guarantee reduces the risk for the lender and can improve your chances of being approved. The US 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 handy to cover unexpected business expenses and meet short-term financing needs. Many business credit cards also offer perks, such as cash back or points that you can redeem for travel, online purchases, and gift cards.
- Equipment financing — If you need financing to purchase business equipment, consider equipment financing rather than a personal loan. Equipment financing is usually less expensive since it is secured by the equipment itself.
- Merchant Cash Advance — If your business processes a large number of credit card payments, you may be eligible for a merchant cash advance. You repay this type of loan by authorizing the merchant’s cash advance company to charge a percentage of daily credit card sales.
If you’ve weighed your options and decided that a personal loan is right for you, Credible lets you compare personal loan rates to find the one that best suits your needs.