how to use a business loan to finance your side hustle project

The nice thing about a side hustle is that you can put as much or as little effort into it as you’d like. It can be a robust source of extra income for you, or a fun hobby that generates a little spending money.

Let’s say that your side hustle starts to pick up steam, and you’re starting to see it as a legitimate small business play. Maybe it’s time to put more money behind your side hustle operations—to pay for more marketing, improved material quality, or whatever else you need to bring your side hustle to the next level. Where can you get the funding?

It’s tempting to use your personal savings—few options are more convenient than going to the ATM—but if you’re not prepared to make that kind of investment in a side hustle, what are your alternatives?

If donations or loans from your personal network aren’t an option, it’s time to explore how you can use business loan products to finance your side hustle.

How to lay the groundwork for a side hustle loan

Getting a loan for your side hustle is going to be difficult if you don’t prepare first. You’ll need to treat your side hustle as a legitimate business first—otherwise, why would a business loan lender treat it any differently?

Here’s a quick business loan requirements checklist:

  • Write up a business plan: For some lenders, this is a requirement. Regardless, it’s still good to have a written document outlining where your business stands and where you want it to go—especially with an influx of new funding. 
  • Separate your business and personal finances: If you’re using your personal credit card and/or bank accounts to run your side hustle, you’re asking for a paperwork headache. You’ll also fail to build crucial business credit.
  • Prepare financial documents: Get ready to bring any documents that show how you and your business are doing—bank statements, balance sheets, tax returns, A/R and A/P aging—to the table.
  • Provide collateral: There are few unsecured business loans out there. Be prepared to offer personal collateral to secure the loan.
  • Improve your credit scores: Lenders often look at both your business and personal credit scores, so clean up your credit (or learn about what goes into building it) before you apply.

Different lenders, whether they’re traditional banks or online lenders, will have different loan requirements and expectations. Getting the above things in order, however, is a good place to start for any loan.

Your side hustle loan options

The longer you’ve been “in business” with your side hustle and the better you’ve done, the better your loan options will be.

For example, most traditional bank loans won’t be available to any small business unless that business has been in operation for at least a few years. Online lenders more readily deal with newer businesses, but charge higher interest rates over shorter repayment periods as a result. You’ll have to crunch the numbers to see which kind of business loan makes sense for you.

That said, here’s a general roundup of the best side hustle loan options that you might qualify for:

SBA Microloans

The Small Business Administration’s loan program is the crown jewel of the small business financing world. While most SBA loans are for well-established businesses, the Microloan program (which delivers loans ranging from $500-$50,000 for new businesses) is a great first step for turning a side hustle into a bigger business.

Online short-term loans or lines of credit

A variety of online lenders have entered the lending space, and are willing to grant short-term loans or revolving lines of credit to eligible businesses. For a major investment, a short-term loan could work well for a side hustle; a line of credit is best if you see yourself with ongoing costs you’ll need to cover, such as taking advantage of seasonal discounts to boost your inventory.

Many lenders have time-in-business requirements: for some, it’s as little as three months, but more often it’s at least 12 months.

Equipment financing

If your side hustle needs help purchasing a new piece of major equipment, such as a vehicle or piece of kitchen equipment, equipment financiers can extend the exact amount you’ll need to cover the expense, which you’ll repay plus interest.

Inventory financing

Similar to equipment financing, inventory financing is when you use a loan to cover the exact amount you’ll need for a big inventory purchase. If you need the money to get a great deal now on inventory, this options works well.

You won’t need additional collateral for inventory or equipment financing, as the inventory or equipment itself secures the loan.

Personal loans

It’s worth mentioning that you can absolutely use a personal loan to finance a side hustle. Personal loans may be easier to qualify for than business loans (especially if you are just getting your side hustle off the ground), and often come with lower interest rates and no collateral requirements.

The total amount you can borrow with a personal loan is lower than with a business loan (many personal loans max out at around $30,000), and you won’t build business credit. But for your purposes, for now, that might work fine.

Business credit cards

Business credit cards are also an excellent financing tool for side hustlers. Some elite cards come with a 0% introductory APR, or other benefits that you can use to reinvest in your business. When financing larger purchases that you might not have the cash on hand for right away, a credit card is a good choice that helps you build business credit as well.

How you can use your loan

Every business loan and every lender can have different restrictions or requirements around loans.

For example, you can’t use SBA loans to pay off existing debt or to purchase real estate. You are allowed to use them for working capital needs or the purchase of inventory, equipment, and other assets. Some forms of financing will be for specific use cases, such as the equipment or inventory financing.

Some credit cards, on the other hand, allow you to perform balance transfers—which is helpful if your new card has a low or 0% interest rate for a certain amount of time, helping you manage what would otherwise be ballooning business debt.

If you’re looking for a loan that can help you build out your side hustle in every way possible—perhaps you have an eye on investing in software to improve operations, in marketing to gain more leads, or even hiring an employee or two—then consider a personal loan, a microloan, or even crowdfunding via a platform like Kickstarter. You’ll have more latitude. Just remember, you need to make a business case for your loan—a real reason for taking out the loan, with an expected return on investment—or you’ll struggle to repay it.

The bottom line on side hustle loans

Financing a side hustle isn’t unlike financing any other small business endeavor. Maybe your ambitions for a side hustle are a little less grand; but if you’re taking out money to finance its growth, that’s still a serious investment. Take this process seriously, and you’re much more likely to see success—and to set yourself up to make this a full-time gig, if that’s what you’re building towards. 

photo of Eric Goldschein

Eric Goldschein is a staff writer at Fundera, a marketplace for small business financial solutions such as business loans. He covers entrepreneurship, small business trends, finance, and marketing.