Can a personal loan be used for a business?

If you are looking to start a business, a personal loan may be able to provide a helpful boost for your starting capital, but before you jump in and apply for a personal loan, there are a few factors to consider.

It may be possible to use a personal loan to start a business. But there are factors your lender will consider before giving you the loan.

When a lender assesses any loan – whether it be a personal loan, car loan, or home loan – they will assess the serviceability of the loan; that is, your ability to pay it back. When lenders offer home or secured car loans, they know that, should the borrower not be able to repay the loan, they have an asset (property or car) they can sell to help them get their money back.

With unsecured personal loans, however, they are taking the risk of lending money without an asset as protection should you default on the repayments or run into financial trouble down the road. This means unsecured personal lending can come with higher risk for the lender.

This risk can result in stricter lending criteria, or higher interest rates for the borrower. When using a personal loan for a business, it’s also important to keep in mind that the success of the business has no influence on your loan repayments. Should the business fail, the personal loan remains your responsibility to repay.

Each lender will have its own lending criteria and process. The lender may require information on your current income, the business you are buying or starting, and other personal information like your credit score.

Personal loans are considered either secured or unsecured.

A secured personal loan is a loan that has an asset secured against the loan, such as a car. This means that, if you fail to meet the repayments, your lender can sell the car to pay off your debt.

An unsecured personal loan has no asset attached to the loan as security. Unsecured loans may come with higher interest rates because the lender has no asset to act as a back-up if you fail to meet your loan repayments.

Lenders may also employ risk-based pricing when assessing personal loan applications. This means the interest rate you are charged on your personal loan is dictated by your perceived trustworthiness as a borrower.

The more trustworthy you are as a borrower, the lower the interest rate will be.

Your trustworthiness can be assessed by:

• Your credit score
• Your income
• Your expenses and liabilities
• How much you wish to borrow
• Loan duration.

Not all business expenses are appropriate or eligible for a personal loan, so it’s important to consider your situation and for you to decide on the best course of action. Some situations that may be suited to a different approach could include.

A personal loan for a business might be useful if you are looking to start your own business. In this case, you may be looking for starting capital to get the business up and running.

However, if you are looking to buy an established business, a business loan may be recommended by your lender. Business loans can be applied for by multiple people, which can lift some of the financial pressure if you are purchasing a business with other people. Additionally, if you are starting a business in a niche field, you may have less chance of being approved for a personal loan than in an established field.

Your eligibility for a personal loan can depend on your current income. If you are planning to quit your current job to focus on your new business venture, this may impact your ability to pay back your personal loan.

This could affect your lender’s willingness to lend you the money because they will be assessing your borrowing power on how much money you have been earning in recent years (usually the past two years).

Much like other forms of lending, using a personal loan to buy a business may require a deposit or asset as security for the loan. If you don’t have adequate savings, or equity in a property, a lender may deny your application for a personal loan for a business.

One of the main risks associated with using a personal loan for a business is the responsibility you are taking on regardless of the success of your business. Should your start-up or business acquisition fail, you still need to service the loan.

In the event you are unable to meet your repayments, your credit score may be impacted, which could subsequently impact loans in the future such as car or home.

The decision to apply for a business loan or personal loan will depend on your circumstances.

A lender may choose to decline a personal loan application they feel is too risky. Always be transparent with your lender as they may be able to help guide you towards a product that suits your situation best.

When comparing business and personal loans, you may wish to consider:

Personal and business loans can charge application, ongoing and exit fees. Consider how much these can add to your expenses before applying. Lenders are required to disclose these fees to you. You can ask your lender for documentation which will outline the fees and charges with each loan product.

The interest rate is the added cost the lender will charge you for the service of lending you money. Loan rates are either fixed or variable. Fixed rates mean your repayments will stay the same for the duration of your loan. Variable rate loans mean the interest you are charged can change from month to month. Fixed rates can be great to help you budget for the future and shore up your position in the face of rate rises, but come with the risk of missing out on savings if the variable rate goes down during the loan period.

Some loan products will allow you to make extra repayments. This allows you to take chunks off your debt should you be in a financial position to pay it off early. Be sure to check with your lender if their product allows extra repayments when considering which loan to choose.

When applying for a personal loan, you will generally need to meet the following criteria:

• Be 18 years old
• Be an Australian resident or citizen
• Have consistent income.

Different lenders will assess your income differently. For sole traders, you may be required to have had a registered Australian business number (ABN) for two years. You may also need to show your recent financial year earnings.

Lenders might also want to look at your credit score and credit history when assessing your eligibility.

It’s important to remember that even lenders who say they offer personal loans for any purpose, can still ask about your intentions for the loan. Your business plan may ultimately impact whether they offer you a personal loan.