Using the proceeds from a personal loan to build a startup is very risky, but has been a method some entrepreneurs have used in the past. A personal loan, is personal, that means that the individual borrower will bear the repayment consequences directly.
Because personal loans are not designed for commercial purposes, their terms are often not a good fit for startups. First, the repayment term can often be short, 3-12 months, which means that the monthly repayment amount is very high. Second, interest rates can range widely based on the loan product and the credit-worthiness of the individual borrower, so make sure to do a lot of shopping on rates.
The main benefits of personal loans is their wide availability, and the quick approval times. Nearly every bank, credit union, and hundreds of online lenders offer personal loans, with instant approval.
Please note: Often using the proceeds of a personal loan for business expenses is a violation of the terms of a personal loan agreement. Violating a loan agreement can cause a number of financial and legal risks, so if you are considering doing this, please make sure you find a loan partner who allows this.
The Basics
Industries
Personal loans are not approved for use in starting any type of business, regardless of industry, and it may be a breach of your loan terms to use it as such.
Business stages
Sometimes founders take a personal loan when they don't have any other option available to start their business. However, we don't recommend this at any stage since it's typically not designed for business purposes and may even be against the loan agreement.
Pros
Rates: Rates can be low for borrowers with high credit scores.
Quick approval: Most banks and lenders have online applications with instant decisions.
Fast funding: After approval and acceptance most personal loans fund within days.
Cons
Personal risk: Unlike a Paintbrush Loan income-driven guarantee, most personal loans are unstructured, possibly requiring a borrower to sell personal assets or drain their savings to repay.
Size and term: Personal loans are often small in size, and require quick repayment, more suited for purchasing personal assets or making home or auto repairs.
Credit score: Unlike most commercial loans, including the Paintbrush Loan, a personal loan often requires a lender to make a hard credit pull and report repayment back to credit bureaus.
Not tax deductible: Interest on a commercial loan is usually tax deductible, however most personal loans are not deductible.
What happens if the business is successful
Phew! You made it through. Your personal credit is still intact, and your business is thriving, and now hopefully you're either successful enough to continue growing on customer revenue or eligible for other forms of funding.
What happens if the business fails
Since this loan is in your name rather than the business's name, it likely won't make a difference to the bank either way. What it may mean to you though is that your income source has dried up, you've taken a risk and destroyed your personal credit for nothing, and you're still stuck with a punishingly fast repayment timeline. Worst case—bankruptcy.
Types of personal debt
Most of these are NOT sanctioned for starting a business:
Credit cards
Second mortgage, refinance, or HELOC
Personal loan from bank
Loans from friends or family
How to get it
The best way to get a personal loan is to shop rates and terms, however you'll want to keep in mind that most application forms will make a hard pull on your credit, which causes your personal credit score to drop each time. So in order to maximize your chances of approval for a loan with rates and terms you desire, you'll want to look at the advertised rates and terms across a lot of lenders, then prioritize applications for the best fit.