Starting a business can require a lot of upfront and ongoing capital. If you don’t have the cash sitting in the bank, you may be weighing your financing options – including a personal loan.

But is it a wise idea to take out a personal loan to start a business? We’ll describe how personal loans work, explain when a personal loan could be the right financial tool, and offer alternatives to consider. That way, you can secure the funding you need to launch a successful enterprise.

How do personal loans work?

A personal loan is exactly what it sounds like — a loan issued to an individual to cover a wide range of expenses. Personal loan funds can generally be used for any purpose, but some lenders impose restrictions, so it’s important to check before applying.

Personal loans typically have these features and characteristics:

• Unsecured. Most personal loans are unsecured, meaning you don’t need to pledge collateral—such as your home, car, or savings account—to qualify. However, because lenders take on more risk with unsecured loans, interest rates are often higher compared to secured loans. 
• Relatively small amount. Personal loans generally have a maximum range of $50,000 to $100,000 (depending on the lender), which you may exhaust quickly, depending on your expenses.
• Lump sum funding. You’ll receive all of your money in a single deposit.
• Relatively low interest rate. If you have good credit, a personal loan will likely have a lower interest rate than a credit card. (Currently, the average personal loan interest rate is roughly 13%, while the average credit card interest rate is around 20%.)
• Fixed interest rate. Your interest rate stays the same for the life of the loan, unless you refinance it.
• Stable monthly payments. A fixed interest rate means set payments, so you’ll know how much to budget each month for loan repayment.
• Multi-year repayment terms. Common repayment terms range from two to seven years, though your lender may offer other arrangements.
• Fast funding time. You can receive your money within a day or two of your application getting approved – especially if you go through an online lender.
• Fees. On top of interest, your lender may charge fees to process your application, originate your loan, or perform other loan-related services. If you have good credit, you may be able to find a loan with few fees.

Personal loan requirements

Personal loans are often easier to qualify for than business loans – especially if you have a startup. 

• Credit score. Most lenders look for a good credit score (620+), though higher scores often qualify for better rates. 
• Income. You’ll need to show proof of steady income (pay stubs, tax returns, or bank statements) so the lender knows you can repay the loan.
• Employment history. A consistent work history can strengthen your application. If you’re self-employed, be prepared to provide extra documentation.
• Debt-to-income (DTI) ratio. Lenders often want your monthly debt payments to be no more than 35–40% of your income. Paying down existing debt can help improve this number.
• Collateral (sometimes). While most personal loans are unsecured, some lenders may give you the option to secure the loan with an asset in exchange for a lower rate.

Generally, business loans have more stringent requirements, such as a business credit score, a certain amount of time in operation, and a minimum monthly revenue. Sometimes, you may even need to offer up collateral. 

The pros and cons of using a personal loan to start a business

Pros

At a glance, here are the potential perks:

• May be easier to obtain than a business loan.
• May be a cheaper way to borrow than a credit card.
• Fast funding.
• Predictable monthly payments.
• No collateral required.

Cons

And here are the potential pitfalls:

• May not provide as much funding as you need (For contrast, Small Business Association (SBA) business loans go up to $5 million).
• May require a relatively short repayment term (SBA loans feature repayment terms of up to 25 years).
• Lacks funding flexibility since you get your cash all at once, as compared to a line of credit you can pull from when needed.
• May charge expensive fees, reducing the amount of cash you receive and increasing your cost to borrow. 

When it makes sense to use a personal loan for business

A personal loan could be the right financial tool for:

• Startup costs. If you’re launching a new business and don’t yet qualify for a traditional business loan.
• Quick funding needs. Personal loans are often faster to apply for and receive than business loans.
• Small, manageable expenses. Ideal for covering equipment, supplies, or other short-term costs.
• Limited financing options. If you don’t have business credit history, lenders will evaluate your personal credit and income instead.
• Bridge funding. Useful as temporary support until your business qualifies for dedicated business financing.

How to get your personal loan to start a business

Understand your situation

Create a list of everything you need the loan to cover and assign a dollar value to each item. Then, add up all of the items to determine how much you need to borrow. 

Next, check your credit score, income, and calculate your DTI. 

You’ll also want to look at your overall financial picture. Do you have room in your budget to accommodate another debt payment? If so, how much can you comfortably afford to pay each month? This knowledge will help you choose a suitable loan term.

Shop around and compare your options

Now that you know your target loan amount, credit score, and ideal repayment term, it’s time to look at specific loans. You can find personal loans at most banks. Plus, some financial websites compile lists of the best options in the market (according to their rating scale), making it easy to learn about several products in one place.

As you explore loans, take note of the potential:

• Loan amounts
• Repayment terms
• Interest rates
• Fees

You should also look into:

• The application process
• Funding time
• Customer service available
• Lender reputation

Once you have a short list of loans, see if each lender offers an online pre-qualification process. If so, you may be able to get preliminary loan offers. If the best preliminary loan offer meets your requirements, it’s time to submit a formal application.

Apply for the best loan

Gather the information required to apply for your personal loan. You’ll likely need to verify:

• Contact information.
• Personal details, such as your date of birth and social security number.
• Annual income.
• Monthly housing expense and whether you rent or own.
• Desired loan amount and why you need the funds.
• Bank account information to receive funds if approved.

You may need to provide proof of your income through pay stubs, tax returns, or bank statements. Be prepared to submit them to your lender.

Get your funds

If your application is approved, you’ll receive an official loan offer. If you accept the offer, you’ll need to sign a loan agreement to receive your funds.

Be sure to add payment reminders to your calendar or phone. You may want to set up automatic payments so you never pay late.

Alternatives

If a personal loan isn’t the best way to finance your new business, there are other options to consider, such as:

Small business loan

A small business loan may be a better fit if you need to borrow a large sum and want many years to repay the debt. The two biggest downsides are that it may be harder to qualify for than a personal loan (though there are business loans for startups with bad credit), and it could take significantly longer to receive funding.

Requirements:

• A solid personal and/or business credit score (often 650+ for traditional lenders).
• Business operating history (usually 1–2 years in business).
• Financial statements (profit and loss, balance sheets, tax returns).
• Proof of revenue or cash flow to show repayment ability.
• Collateral (sometimes required, especially for larger loans).
• A detailed business plan for startups or higher loan amounts.

Small business line of credit

A small business line of credit could suit your business if you want a more flexible funding option. It functions like a credit card, so you only need to repay what you borrow, and you can borrow as much or as often as you like – up to your credit limit.

Requirements:

• Fair to good credit (personal or business, depending on the lender).
• Business history (commonly at least 6 months to 1 year).
• Bank statements or financial records to prove consistent cash flow.
• Annual revenue minimums (varies by lender).
• Collateral may be required for higher credit limits.

Small business credit card

A small business credit card may be easier to qualify for than a small business loan and functions similarly to a small business line of credit. Having this credit card can make it easier to keep business and personal expenses separate.

• Good personal credit (often 670+) — personal guarantee is usually required.
• Employer Identification Number (EIN) or Social Security number.
• Business information (legal structure, industry, years in operation).
• Estimated business revenue (even if it’s low for new businesses.
• Sometimes a minimum annual income from personal or business sources. 

Home equity financing 

If you’ve owned your home for a while, you may be able to tap into your equity to finance your business with a home equity loan, home equity line of credit (HELOC), or home equity investment (HEI). 

A home equity loan offers a single lump sum payout in exchange for fixed monthly payments over a term of 5 to 30 years. Alternatively, a HELOC offers a revolving line of credit that can be drawn upon as needed during a 5- to 10-year draw period. Rates for both are generally more favorable than personal loans and credit cards. 

Requirements:

• Good credit (620+).
• Sufficient equity.
• Proof of steady income. 

A home equity investment is an alternative way to draw on your home’s equity. You get a lump sum payout in exchange for a share of the home’s future appreciation. There are no monthly payments. Instead, homeowners repay the investment plus the agreed-upon percentage of future appreciation (change in value, not total home value) anytime during a flexible 30-year term. 

Requirements:

• A credit score above 500.
• Sufficient equity.
• Income and DTI are not a factor.

Home equity financing typically offers more competitive rates and terms because your home serves as collateral. However, this means you risk losing your home if you're unable to make payments. Therefore, it's important to be confident about your ability to repay.

Frequently asked questions

Can a startup LLC get a loan?

Yes—though it can be a little tricky. Many traditional lenders prefer to work with businesses that have been operating for at least a year or two and can show steady revenue. Since most startups don’t have that track record yet, approval can be harder.

That said, there are still options: some lenders offer startup-friendly business loans, and you may also be able to use a personal loan, business credit card, or even a line of credit to get your LLC off the ground. Having a strong personal credit score, a solid business plan, and some initial revenue (even small) can go a long way in helping you qualify.

Is taking a loan to start a business a good idea?

It may be a good idea to take out a loan to start a business if your business plan is viable and you have the means to repay the debt. If you’re not sure about either of those things, you probably shouldn’t borrow.

How much money can I borrow to start a business?

The amount of money you can borrow to start a business depends on several factors, including but not limited to your creditworthiness, the type of financial product you apply for, and your business plan. The amount you should borrow depends on how much you can comfortably afford to repay.

Final thoughts

A personal loan may be a good way for you to finance your new business. However, you should carefully evaluate your needs and compare several financial products before making a commitment.