Generally, personal loans are for individuals to use, while business loans are for managing business expenses. However, in some cases it is possible to take out a personal loan for business purchases, though it’s important to compare your options and know the risks involved.
Can you use a personal loan to buy a business?
It may be possible to use a personal loan to buy a business, though depending on the size of the business you’re buying and the status of your personal finances, there may be other finance options available to choose from.
One of the first things to check before applying for a personal loan to buy a business is whether your chosen lender provides personal loans for this purpose. Some lenders may not be willing to take the financial risk of lending you money to buy a business that may or may not succeed, leaving you unable to pay back your loan.
Can you use a personal loan for anything?
Many lenders limit what you can do with one of their personal loans, to help reduce their financial risk.
For example, a lender may be happy to lend you money to buy a car (if you don’t pay them back, they can often cover their losses by repossessing and selling the car), but less inclined to give you a loan to splurge on a holiday (once that money’s gone, it’s gone).
If a lender doesn’t usually offer personal loans for the purpose you have in mind, you may be able to contact them and see if they’ll make an exception, or you can compare other finance options from alternative lenders.
What risks are involved when using personal loans to purchase a business?
As the name implies, a personal loan is taken out by an individual person, and not a company (that’s a business loan). This means responsibility for the loan is all on you – even if your business fails through no fault of your own, it’s your finances and your credit rating that will bear the financial consequences, which may leave you struggling to borrow money in the future.
If you take out a secured personal loan, you may pay a lower interest rate, but you may lose your security asset (your deposit, your car, even your business) if you’re unable to repay the loan. Unsecured personal loans don’t require you to put a security asset at risk, however they’re more likely to have higher interest rates.
There’s also the risk that your lender may choose to decline your personal loan application if it feels your business is too risky. Even lenders who offer unsecured personal loans for any purpose may still ask what you intend to do with the money as part of their application process, and your answer may affect their final decision.
Is it better to get a personal loan or a business loan?
If you’re a sole trader, a personal loan can sometimes allow you to buy an established business, or to get a startup business off the ground. However, this does leave you with repayments and financial risk to manage as an individual, which could be difficult if your business is not as successful as you’d hoped.
It’s important to remember that personal loans are often assessed based on your ability to repay the loan on your current income, and don’t take potential future income (such as money made by a business) into account. This could potentially cause problems if you’re planning to leave your current job and concentrate on the business you’re buying.
If you’re looking for finance to purchase an existing business that is already operating, a business loan may be worth considering. Unlike personal loans, business loans can be applied for by groups and not just individuals, which can be helpful if you’re buying a business with the help of one or more partners.
When applying for a business loan, you’ll likely need to provide more information than you would for a personal loan, such as a full business plan, complete with details of the business’s income and expenses. The lender may also consider the level of risk in your industry (e.g. niche markets may be considered riskier than more stable industries), and the relevant experience of you and your partners when assessing your business loan application (e.g. if you’re buying a restaurant, but you haven’t worked in hospitality before, that may raise a red flag).
Do you need a deposit for a small business loan?
Much like many other types of loans, buying a business with a business loan or a personal loan will likely require a deposit or similar form of security, such as a vehicle, or equity in a property.
Business loans may also require additional information, such as a full business plan, tax information, or details of your qualifications.