Using a personal loan to start a business

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Date: 9 May 2022

Woman looking excitedly at her laptop and cheering

Many entrepreneurs starting a business need some kind of capital to get it going, whether it is paying for premises, stock or even a basic website. 

Whilst using savings or some kind of formal investment is ideal, one option is to use a personal loan.

Whilst personal loans are often used for personal reasons such as paying off debts, paying for a wedding, holiday, school fees or even buying a new car, it is indeed possible to use this form of unsecured loan to start a business.

Essentially, from a legal and tax perspective, this type of personal loan is converted into the business as a director's loan and it is under the assumption that the loan will be paid back to the director. 

But certainly, in some cases, a personal loan may be easier to obtain by an individual, rather than a business that has zero revenue or trading history.

Key features

  • Personal loans are unsecured, you typically need an income and fair credit score to be eligible
  • You do not require any assets to be used as collateral
  • You can borrow between £500 to £50,000
  • The personal loan can be converted into a business loan
  • Rates start from 3% APR for good credit customers
  • You should always consider how you are going to repay the loan to avoid late fees and damage to your credit score.

What can a personal loan be used for in a business?

When converted, a personal loan can provide important capital to start a business, whether it is to pay for your first office, hire staff, buy a license, purchase stock or inventory or even pay a developer to build your first website.

Is it OK to use personal loans for business purposes?

Yes, it is OK to use a personal loan for a business, although they are often used for things like home improvements, debt consolidation or purchasing a new car.

But in many ways, getting a business loan is quite tricky, because you often need at least 2 years of trading accounts and show strong revenue or profits.

In some cases, you may need to use collateral or assets you own such as a property or vehicle to be eligible, but you could risk losing this if you cannot keep up with repayments.

What are the benefits and the risks of using a personal loan to start a business? 

Benefits

  • Firstly, personal loans are relatively inexpensive in comparison to business loans. Personal loans start from 3% APR for people with very good credit - just remember that you will need a regular income to be eligible in the first place. The industry is well regulated, offering support and transparency in fees and practices.
  • They don't usually require collateral. Some business loans require you to put up collateral to get funding but most personal loans are unsecured, so you don't have to worry about losing a major asset if you can't repay.
  • Personal loans are notoriously fast because eligibility is based on factors such as income, credit scoring and affordability. In many cases, you can get your personal loan funds within a few days of getting approved. By comparison, some business loan options can take weeks.
  • If you opt for an installment loan, they are repaid over several months or even years. Some products can be repaid over 5 or 6 years giving you lots of flexibility for your business to spread payment over time.

Risks

  • You will need to show some kind of regular income to be approved, which may be tricky if you are starting a new business from scratch. You might need to keep your original job to be eligible.
  • If your business does not generate any income or revenue in its first few months or years, you could find yourself needing to borrow more or in a tricky cycle of debt
  • If you struggle to keep up with repayments, you will face late fees and a negative impact to your credit score which could make it hard to access affordable credit in the future.

Copyright 2022. Article made possible by Tudor Lodge Digital

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