Personal Loans

Should You Get a Side Business Personal Loan?

Should you get a personal loan for a side business? Learn why applying for a personal loan can help build your brand and jumpstart your dreams.
A woman works on her side busness that she got started with a personal loan
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By Geoff Williams
Updated on: August 9th, 2021

The very idea may sound counterintuitive at first. Getting a personal loan to start a small business? Aren’t personal loans for personal stuff and business loans for business stuff?

But what if this small business you’re starting is just a side gig? Or what if it’s going to be your livelihood, but right now, you’re just getting started and don’t feel like you have the credentials to go after a big online business loan? After all, maybe you just need a few thousand dollars, and you’ve never had a business before, and maybe you’re pretty sure that a business loan lender is going to be bothered by that. Would a personal loan for a small business be a good idea?

You could argue that the answer is – yes. After all, there is no law that says you can’t use a personal loan to start a new business. Lenders tend not mind what you do with the money for a personal loan – because it’s, well, personal.

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There are a number of businesses one can imagine starting that would be ideal for a side business personal loan. For instance:

  • Starting an Etsy shop
  • Starting an informational website
  • Becoming a personal or virtual assistant
  • Designing and selling and running an online T-shirt shop
  • Starting a graphics design business
  • Starting a resume writing business
  • Becoming a real estate agent
  • Starting a personal training business

Granted, some of those ideas you may be able to do without any money. For instance, you could probably theoretically run a resume writing company through referrals on Facebook and spend nothing but time if you already have a decent computer, but at some point, you’re probably going to want to upgrade your business’s look and spend a few thousand dollars to get a website up and running. On the other hand, with an online T-shirt shop, you’d need T-shirts, presumably a T-shirt printer (which can cost in the neighborhood of $15,000 or more), packages. There could be some considerable startup costs.

So if you are considering starting a small business, one that might just need, say, $1,000, or $5,000, or maybe $10,000 or more to get it going, and if you want to fund it with a personal loan, before rushing off to apply to personal loan lenders, you should ask yourself a few questions first.

Do I have a business plan? Business owners who are applying for a business loan or going to venture capitalists always have a business plan that they can show their prospective lenders, but creating a blueprint for how you’re going to run your company when you’re going to apply for a personal loan isn’t a bad idea either.

Even if it’s just a business plan you scratch out on a piece of paper or Word document one afternoon, you’ll be doing yourself a favor.

It isn’t that you’ll need to show your lenders your business plan. You won’t. But you should create a business plan for you to examine and pore over.

That’s because a business plan can:

  • Help you understand how you’re going to run your business.
  • Help you get organized, as you start to see just how much inventory you may need – or equipment. If you’re starting a daycare in your home, you may want kid-size tables and chairs, and a lot of toys and games, for instance.
  • Help you set goals for your company.
  • Help you calculate exactly how much revenue you’ll need to get your startup off the ground and up and running.

On that last point, you won’t do yourself any favors if you take out a personal loan for $2,000 when you actually need $7,000. You also may not want to apply for, say, a $7,000 Etsy business loan if you really just need $2,000 in seed money for your Etsy business.

A business plan can help you with those numbers. In fact, if you’re really detailed with your plan, you might start to get a sense of your cash flow. For instance, will you get paid right away, or will there be invoices, and maybe you won’t be paid by clients for a couple weeks? Maybe you’ll get paid once a month, if you’re running, say, a dog walking service. Do you even know if you’ll have any customers when you start your business? Should you borrow a little extra money, so you have funds to pay for any marketing you might do? Or cash so you can pay for anything you need while you wait to get paid?

If you’re stuck on how to create a business plan, there are numerous books out there, like The Secrets to Writing a Successful Business Plan and Creating a Business Plan for Dummies, available at Amazon.com, Barnes & Noble and independent bookstores.

How Will You Pay the Side Business Personal Loan Back?

With the money you make from your business, of course.

But that’s another reason to work on a business plan for yourself, even if it is a plan that only you will see.

In working on a plan, you may come to realize that there are holes in your thinking and that your business isn’t viable at all, and won’t make much money, and that taking out a personal loan for this utterly ridiculous idea would be a big mistake. In that case, is there a Plan B? A different business you should try starting.

On the flip side, you may finish the business plan more confident than ever that you are going to make a lot of money thanks to your Etsy business loan or whatever type of enterprise you’re starting. You may feel far more confident about borrowing funds than you would have without a thoughtful and detailed business plan.

Do I have the documentation that I may need? You will need some paperwork and numbers handy for your personal loan.

Some of the documents or numbers you may need to provide…

  • Driver’s license.
  • Social Security number.
  • Birth certificate.
  • Military ID.
  • Paystubs.
  • Tax returns.
  • W-2s and 1099s.
  • Bank statements.
  • Employer’s contact information.
  • 1099s.
  • Income tax returns.
  • Utility bill.

Yes, that’s quite a list of documents, but keep in mind, you probably won’t need all of that – or anything close to that list. You may only need, for instance, your driver’s license and a paystub. Or maybe you’ll be furnishing a 1099 and your Social Security number.

In fact, personal loans often require far less information than an online business loan. You may only need to provide your name, address and a few little numbers, like an annual salary and your Social Security number.

We’re just saying that all lenders are different, and you may want to have a few of the documents in our bulleted list handy, but in general, if you’re applying for a personal loan, you’ll discover what paperwork you need while you’re applying for the loan, and if you don’t have it around, you’ll go find it. For most people, you’ll have whatever information you need at your fingertips. Let’s not make this harder than it is.

Am I ready to apply for a personal loan and start my small business? Of course you are. Because you’ve asked yourself all the right questions.

About the Author

Geoff Williams is a freelance journalist who has covered personal finance for several years, writing mostly for AOL’s personal finance blog, WalletPop. A former features reporter for The Cincinnati Post, Williams’s work has also appeared in numerous magazines including Consumer Reports, AARP Bulletin and Ladies’ Home Journal. He is the author of “Living Well with Bad Credit” (HCI Books, 2010).