Should You Use a Personal Loan to Start a Side Business?

Why Consider a Personal Loan for a Side Business?

A personal loan is a type of unsecured loan that you can borrow from a bank, NBFC, or online lending platform without pledging collateral. Unlike business loans that require detailed financial history, business plans, or collateral, personal loans are easier to obtain and often come with quicker disbursement.

Many first-time entrepreneurs or side hustlers don’t qualify for traditional business loans because they don’t yet have:

• A registered business track record.
• Proof of consistent revenue.
• Assets to pledge as collateral.

In such cases, a personal loan seems like a practical way to bridge the funding gap and bring business ideas to life.

Advantages of Using a Personal Loan for Your Side Business

If you’re thinking about using a personal loan to kickstart your side hustle, here are some benefits that make it appealing:

1. Quick Access to Funds

When you apply for a personal loan, approval and disbursal can happen within hours or days, especially with digital lenders. This speed is helpful if your business idea depends on timing—like taking advantage of seasonal demand or a limited-time opportunity.

2. No Need for Collateral

Most personal loans are unsecured. This means you don’t need to put your home, gold, or other assets at risk. For new entrepreneurs who might not have assets to pledge, this is a huge relief.

3. Flexible Usage

Unlike business loans, personal loans don’t have restrictions on usage. You can use the money for:

• Buying equipment.
• Paying rent for a small office or shop.
• Building a website.
• Marketing and advertising.
• Initial inventory or supplies.

This flexibility allows you to manage different aspects of your side hustle with one loan.

4. Fixed Repayment Schedule

Personal loans come with fixed EMIs (Equated Monthly Installments). Knowing exactly how much you’ll repay every month helps you plan your budget and manage cash flow more efficiently.

5. Credit Building Opportunity

Repaying your personal loan on time can strengthen your credit score. This will help you qualify for bigger loans in the future—whether personal or business.

Risks of Using a Personal Loan for a Side Business

As attractive as personal loans may sound, there are also some risks you should be aware of:

1. High-Interest Rates

Since personal loans are unsecured, they often carry higher interest rates compared to secured loans. Depending on your credit profile, interest rates can range anywhere between 10% to 24% annually.

2. Personal Liability

Unlike a business loan, where repayment is tied to your business entity, personal loans put the liability squarely on you. Even if your side business fails, you’ll still have to repay the loan from your personal income.

3. Debt Pressure on Personal Finances

If your side hustle takes time to generate profits, the monthly EMI could strain your salary or household budget. For some, this pressure can turn an exciting side project into a financial burden.

4. Impact on Credit Score

If you miss payments due to business struggles, your personal credit score will take a hit. This could affect your chances of getting future loans for personal needs like buying a house or a car.

5. Limited Loan Amounts

Personal loans usually have caps (from ₹50,000 to ₹25 lakh depending on the lender). If your business idea requires heavy funding, a personal loan might not be sufficient.

When Does a Personal Loan Make Sense for a Side Business?

A personal loan may be a smart move if:

• You need a small amount of money to get started (e.g., under ₹5–10 lakh).
• Your business idea has low initial investment needs (like freelancing, e-commerce reselling, or digital services).
• You already have a stable salary or another income source to comfortably repay the EMIs.
• You’ve done market research and are confident in your side business plan.

On the other hand, if your business requires large-scale investment, or if you don’t have stable income, taking a personal loan might expose you to unnecessary financial risks.

Alternatives to Personal Loans for Starting a Side Business

If you’re not fully convinced about taking a personal loan, there are other funding options worth exploring:

1. Bootstrapping with Savings

Using your own savings minimizes risk since you don’t owe money to anyone. Even if the business fails, you won’t be burdened with loan repayments.

2. Business Loans for Startups

Some banks and NBFCs offer small business loans designed specifically for new ventures. While harder to qualify for, they may provide higher amounts at lower interest rates.

3. Credit Cards

If your business expenses are relatively small and spread over time, credit cards can provide short-term funding. Many cards also offer reward points and cashback benefits. But remember, interest rates on unpaid balances are extremely high.

4. Friends and Family Funding

Borrowing from close contacts can help you avoid bank formalities and interest rates. However, it’s important to maintain transparency to avoid straining relationships.

5. Government Schemes

In India, schemes like MUDRA loans, Stand-Up India, and state-level startup funds can provide low-interest loans or subsidies for new businesses.

6. Crowdfunding & Angel Investors

If your side business has a unique product or idea, platforms like crowdfunding websites or pitching to angel investors might help you raise funds without debt.

Key Factors to Consider Before Taking a Personal Loan

Before applying for a loan, make sure you’ve thought through the following points:

1. Clear Business Plan – Have a roadmap for how the money will be spent and how the business will generate revenue.
2. Repayment Ability – Calculate EMIs with a loan calculator and ensure they don’t eat up more than 30–40% of your monthly income.
3. Loan Terms – Compare interest rates, processing fees, prepayment charges, and tenure across lenders.
4. Emergency Backup – Keep an emergency fund aside in case your side business doesn’t take off immediately.
5. Credit Score – Maintain a good CIBIL score (usually above 700) to qualify for favorable interest rates.

Smart Ways to Use a Personal Loan for a Side Business

If you decide to go ahead, here are some smart strategies to maximize the benefits of your personal loan:

• Invest in essentials first: Prioritize spending on things that directly generate income, like tools, inventory, or marketing.
• Avoid overspending: Don’t use loan funds for luxuries like fancy office spaces or non-essential gadgets at the start.
• Track expenses closely: Keep a record of every rupee spent from the loan to ensure funds are used wisely.
• Repay early if possible: If your side business grows faster than expected, consider prepaying the loan to save on interest costs.

Real-Life Example

Let’s say Ravi, a salaried IT professional, wanted to start an online clothing store. He applied for a personal loan of ₹3 lakh to build a website, buy initial stock, and run digital ads.

Because his job provided him with a stable salary, he could comfortably manage the ₹8,000 EMI while his store grew slowly over the next 8–10 months. By the end of the year, his business started generating profits, and he even prepaid a part of his loan.

This is a classic case where using a personal loan for a side business worked out. But if Ravi had no stable income or if his business required heavy capital, the loan could have quickly turned into a liability.

Is a Personal Loan Right for Your Side Business?

The answer depends on your situation. Yes, a personal loan can be a great tool to kickstart your side hustle if you need quick, flexible funding and have the confidence (and income stability) to repay it.

But it’s not the right choice for everyone. If your business requires significant capital, has uncertain profitability, or if you don’t have steady income, taking on personal debt can put unnecessary strain on your finances.

Always weigh the potential upside of your side business against the risk of personal liability before committing to a loan.

Starting a side business is one of the best ways to grow financially and explore your passions. A personal loan can be a stepping stone to make your entrepreneurial dream a reality—but only if used wisely.

If you’re disciplined, have a clear repayment plan, and your side hustle needs moderate funding, a personal loan could be your launchpad to success. However, if risks outweigh benefits, it’s smarter to explore alternatives like savings, government schemes, or even scaling your business gradually without debt.