Can a personal loan be used for business purposes?

You might be able to use a personal loan for business purposes – it depends on the loan's terms and conditions. Some lenders will allow it, whereas some will prohibit it. 

When you apply for personal finance, most lenders will ask you what you will use the loan for. It's essential, to be honest: if the lender finds out that you're using the funds for a prohibited purpose, you may have to repay the loan immediately. 

The lender will check your income, financial commitments and personal credit score to see if you can afford the repayments. If your personal credit history is wrong or you haven't built one up, you might not get approved for a loan with a reasonable interest rate.

Some startup owners may consider using a personal loan to help get their business off the ground because it can be challenging to get a business loan when you haven't been trading for very long. These days, however, there are startup finance options out there for businesses that haven't been dealing with for a year or more. 

Things to consider

If you're allowed to use the personal loan for business purposes, you might not be required to supply security, meaning your business assets won't be at risk. However, it's important to remember that you'll be personally liable for the repayments (including interest), even if your business has multiple directors.

Depending on the borrower's circumstances, you might not be able to borrow as much through personal loans, which tend to be for £25,000 or less. A personal loan won't help build up your business's credit score. If you've tried to get a business loan through your bank but were unsuccessful, don't panic – you might be eligible elsewhere.

So, what are some of the alternatives?

Alternatives to using a personal loan for business

There are lots of business-specific types of finance out there today. You can use business finance for growth or bridge a cash-flow gap. Some finance options, such as asset finance, are designed with a particular purpose. 

Unsecured business loan 

Unsecured business loans don't require you to provide security. So if your business doesn't own any assets or you don't want to put them at risk, this could be a viable option. Depending on the loan terms, you may have to offer a personal guarantee.

Business overdraft 

Much like a personal overdraft, a business overdraft provides instant access to funding as and when you need it, and you only pay interest on the outstanding amount. Overdrafts tend to be for smaller amounts and are designed for the short-term. 

Revolving credit facility 

Like an overdraft, you only pay for what you use and can dip into the funds when you need to. Revolving credit facilities have a pre-approved limit, and you get charged interest when you use them. In short, you can tap into it when your business needs a quick cash injection.

Business credit card 

Have you considered a business credit card? A business credit card is issued to your business account and comes with a credit limit based on your business' credit history. Paying your credit card bills on time can help you improve your business credit score. 

Merchant cash advances 

With a merchant cash advance, the lender advances you the funds you repay through a percentage of your customers' card payments. It's flexible in that – unlike a traditional loan – you don't have to repay the same amount every month.

Asset finance 

If you can't meet customer demand due to a lack of equipment, asset finance can help you spread the cost. Depending on the type of asset finance you take out, you can buy the asset outright at the end of the finance term, return it or upgrade to a newer model. 

Invoice finance 

Invoice finance lets you unlock cash tied up in your unpaid invoices. The lender pays you a percentage of the value of the invoice, and you repay it – plus a fee – when the customer pays. Compared to some business loans, invoice financing has a speedy turnaround.

Are you ready to start your funding journey?

Is my business eligible? 

If you have a business that can meet its financial obligations, yes. Whether you are a sole trader, a partnership, a limited company, or a start-up - there are many kinds of business loans available with a lender to suit every need. 

How to find a business loan

You know your business; we know business finance. Discovering the best business loans, with the most competitive rates and the ideal lender can be time-consuming and complicated. 

However, through our award-winning, innovative and data-driven platform, Funding Cloud™, we can offer speed and certainty for SMEs through a real-time, centralised and two-sided marketplace delivering instant decisions and firm offers from lenders.

Register free today with Funding Cloud™ and connect your business to lenders and partners to facilitate fast, accurate and secure funding at scale.