Using a Personal Loan to Start Your Business - Learn (2024)

FAQs

Can a personal loan be used to start a business? ›

The short answer is yes, a personal loan can also be used to cover expenses associated with starting a small business. “Once you're approved for a personal loan, you can use it in any way that makes sense to,” said Ashley Russo, a Financial Planner and Educator.

Is it a good idea to get a loan to start a business? While getting a business loan for a startup is risky, many startups need a loan to get off the ground. You may choose to take out a business loan if you have a solid business plan and a product or service that's highly marketable to your target customers.

Otherwise known as bootstrapping, self-funding lets you leverage your own financial resources to support your business. Self-funding can come in the form of turning to family and friends for capital, using your savings accounts, or even tapping into your 401(k).

Usually, but not all lenders offer personal loans for small businesses. If a lender lets you use a personal loan for business, you'll have to take it out in your name, not your business's. You can usually find a lender's loan restrictions on its website.

Not tax deductible: With business loans, the interest you pay on the loan is tax deductible. This is typically not the case with personal loans, even when used primarily for business purposes.

If you run a business or are self-employed, you may be able to deduct the interest you pay on a business loan (or the portion of a personal loan) you use for business purposes. To qualify, you must: Be liable for the debt. Intend to repay the debt, and the credit must be expected to be repaid.

Personal liability: When you take out a personal loan for your business, you are on the hook if your company fails to repay the debt as promised. Your personal credit could suffer if there are late payments or a default occurs. The lender might even sue you and seize personal assets in the event of nonpayment.

LLC members can tap into their own personal assets to fund their company. This can take different forms, such as investing savings, using personal assets as collateral for a loan, or liquidating assets and putting the proceeds into the LLC.

How do you pay yourself when starting a small business? ›

Owner's draw: This allows business owners to pay themselves without issuing regular paychecks or withholding employment taxes. You can simply write a check to yourself from the business checking account or transfer money from your business account to your personal account on an as-needed basis.

The U.S. Small Business Administration (SBA) has several programs to help finance small business loans. Many SBA loan programs combine business coaching and technical assistance, as well as access to financing, on more flexible terms. One example is the 7 (a) Loan Program, SBA's most widely-used loan guarantee program.

If your small business needs a vehicle, consider a small business auto loan. While you can use a personal auto loan to purchase a car for your small business, you'll miss out on better rates and potential tax benefits, such as the ability to write off loan interest and the commercial clean vehicle credit.

First, the withdrawal should be documented as a loan and a legally enforceable promissory note should exist. Valid corporate minutes should exist authorizing the loan. Second, interest should at a minimum be provided for at the applicable federal rate. Collateral should be provided where appropriate.

You generally don't need to consider personal loan proceeds as taxable income, and you won't get to deduct the interest you pay on your tax returns. However, there are a few rare exceptions to this. If you use your personal loan for business purposes, you may be able to deduct the interest you pay.

Can an Individual Give an Unsecured Loan to a Company? Unless your operating agreement has restrictions on loans from members, generally a member of an LLC can give an unsecured loan to their company, as can a third-party who's not involved in the business.

Lines of credit can be used for any business expense. Some lines of credit are unsecured, meaning you won't have to provide physical collateral. Lines of credit tend to be smaller than business loans. Lines of credit can come with additional fees such as annual, draw or inactivity fees.

No, a business loan is different from a personal loan. Business loans are granted to a business, while personal loans are lent to individuals. Business loans typically have higher lending limits and may require collateral, with approval depending on business financials and information.