Can You Refinance a Personal Loan With a Business Loan?

If you’re an entrepreneur, you know it's not easy to take out a small business loan, especially when you’re first starting up. Many small business owners start with personal loans to get the capital they need to purchase inventory, invest in equipment, and maybe secure a location for their businesses.

But once your business is established, you don’t want to your personal finances tied up with your business’s. Plus, you’re missing out on building business credit. That’s why looking into refinancing your personal loan with a business loan can be a smart idea.

Is it possible?

The short answer? Yes! Small business owners can and do refinance those startup personal loans with small business loans.

The long answer? Yes! But it depends on the circumstances. Let’s take a close look into the two main factors: your lender and your presentation.

Your lender

Whether you can refinance your personal loan into a business loan depends on your lender. Of course, each lender will have different preferences and processes that determine what they’re looking for in a borrower—but there are three categories we can talk about broadly.

The “No” lenders

At the end of the day, refinancing a personal loan with a business loan is hard work. It’s more complicated than simply refinancing one business loan for another because the lender will only want to refinance your loan if you used the funds for your business—and that’s hard to prove.

For this reason, there are some lenders that might just say, “No, we don’t do that, sorry.” The bad news is that there’s not much you can do about that; the good news is that there aren’t many lenders who feel this way. Though it takes work, this type of refinancing is also a source of income for lenders, and often the pros outweigh the cons.

The “Yes” lenders

Most lenders fall into this camp. But don’t celebrate just yet…there’s a caveat.

Remember how we said that refinancing your personal loan with a business loan is hard work? That might not stop a lender from ever offering this service, but it could easily stop a lender from offering you this service—if you make them work especially hard.

Think about it from a lender’s perspective. A small business owner comes and asks you to pay back their personal loan, but you can only refinance the part they used for business. How are you going to figure out what that is?

Lenders decide whether to offer personal loan refinancing on a case-by-case basis—and if they have specific guidelines for the process, those aren’t available to the public. They’ll evaluate your package holistically, and decide whether refinancing makes sense for them.

Unfortunately, you can’t predict whether a lender will accept your refinancing request. But you can plan around their needs.

The SBA

SBA loans offer low-interest rates and good terms, even if they are a bit slow on the turnaround—and you can use these loans to refinance a personal loan. Great news, right?

Yes and no. While they give great deals, the SBA is also extremely strict about personal loan refinancing. They typically require 12 months of personal statements and payment histories, as well as all of your receipts to ensure that the loan you’re refinancing was indeed used for your small business.

Yes, you read that right—you’ll potentially need 12 months of receipts. The SBA is very serious and thorough about the refinancing use case.

In addition to these financial documents, you’ll need to prove things like refinancing will increase your cash flow by at least 10 percent, that your existing debt doesn’t meet your needs, and so on. You can read more in the eligibility information section of the SBA’s application or in its eligibility questionnaire.

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Refinancing your personal loan through the SBA will most likely lead to a longer time to funding, as well, as they need to comb through your financials closely to make sure everything matches up.

But while difficult, time-consuming, and not guaranteed, the SBA will most likely offer you the best terms for a refinancing loan. Whether it’s worthwhile is a choice you have to make for yourself.

Your presentation

No matter what, the lender you’re seeking a refinancing loan from will ask for a breakdown of your use of the initial loan’s funds. They’ll want to know what you spent money on generally—as in, for your business rather than for personal items, and specifically—as in, what you actually purchased.

The gist of this is: can you justify everything you spent that personal loan cash on as a business expense?

It’s easy to see how you can explain why you bought an expensive piece of specialized equipment or a large amount of inventory. Who would use a personal loan for a pizza oven or two hundred bottles of cleaning fluid? Your lender most likely won’t question these purchases.

The tricky part is the gray area: it might be difficult to justify those paper clips and staples, or that office chair and desk, or even your gasoline purchases if you run a delivery service. For example, a lender might question how much gas you needed for your business, and how much you used just as a normal driver.

While this seems like a subjective, even arbitrary, metric, realize that if you present your case in an organized and sensible way, your lender will probably believe you. You’re actually using the loan funds for gas? Make a timetable of when you need a car, how far you travel, and how long it takes to get to your destinations. The lender may or may not closely analyze that data, but either way, they’ll be impressed with your dedication.

In short, the easier you make it for your lender to see your expenses as business-related—and the less work they have to do—the more likely it is you’ll get your refinancing.