A personal loan is one of the more straightforward ways to fund an option exercise, but “straightforward” comes with a real tradeoff: you owe the money back no matter what happens to the company. This post covers how personal loans work for this purpose, what they typically cost, and where they stop being a practical option.
How does a personal loan work for this purpose?
A personal loan from a bank, credit union, or online lender gives you a lump sum upfront, which you repay over a set term (commonly two to seven years) with interest, based purely on your own creditworthiness and income, not on the value of your options or the company you work for. The lender has no relationship to your equity at all. It’s the same kind of loan you’d use for any other large expense.
How much can I actually borrow this way?
Most banks and online lenders cap unsecured personal loans somewhere between $50,000 and $100,000 for well-qualified borrowers, though a smaller number of specialty lenders extend up to $250,000 for high-income, high-credit applicants. Your actual approved amount depends on your income, credit score, and existing debt, not on the size of your option grant or your company’s valuation.
What does it actually cost?
Personal loan interest rates vary by lender and your credit profile, but they’re generally fixed for the life of the loan and set independently of your company’s fate. Unlike non-recourse financing, there’s no share of your future upside involved, just standard interest, meaning the total cost is more predictable and, for many borrowers, cheaper in dollar terms than giving up a percentage of eventual proceeds, assuming the company does eventually succeed.
What’s the real risk compared to other financing options?
The core risk is that you owe the full amount back on the loan’s schedule regardless of what happens to your shares. If the company fails, or simply never has a liquidity event, you’re still responsible for every payment, unlike non-recourse financing, where repayment is tied to an actual exit. This makes a personal loan a bet that’s separate from the company’s fate: you’re borrowing against your own income and creditworthiness, not against the shares themselves.
When does a personal loan make the most sense?
It tends to make the most sense for smaller exercises within the typical lending caps, where the interest cost is likely to be lower than what a non-recourse financing arrangement would take as a share of your proceeds, and where you’re comfortable with the fixed repayment obligation regardless of outcome. For a larger exercise beyond what personal loan limits allow, or for someone who wants to avoid any recourse debt entirely, other options become more relevant.
Worked example
Say you need $40,000 to exercise a batch of options, within typical personal loan limits. You take a five year personal loan at a representative rate, resulting in fixed monthly payments over that term regardless of what happens to your shares.
If the company eventually has a successful exit and your shares are worth $300,000, you keep the full amount minus whatever you’ve paid in loan interest over the term, a materially better outcome than giving up a percentage to a financing provider. If the company fails, you still owe every remaining loan payment, with nothing to show for it beyond the shares themselves (which are now worthless), a real financial loss on top of losing the equity’s value.
FAQ
Is a personal loan cheaper than non-recourse financing? In dollar terms, often yes, if the company succeeds, since you’re only paying fixed interest rather than a percentage of your eventual proceeds. The tradeoff is that you owe the loan back regardless of outcome, while non-recourse financing doesn’t require repayment if the company fails.
How much can I typically borrow with a personal loan? Most lenders cap unsecured personal loans between $50,000 and $100,000, though some specialty lenders go up to $250,000 for well-qualified, high-income borrowers.
Does my option grant or company valuation affect how much I can borrow? No. Personal loan approval is based on your own income, credit, and existing debt, entirely separate from your equity.
What happens if I can’t make loan payments? The same as any other personal loan default: it affects your credit and can lead to collections, regardless of what’s happening with your stock options.
Can I use a personal loan for a very large exercise? Typically not entirely on its own, since most lenders cap unsecured personal loans well below what a large exercise plus tax bill might require, though some people combine a personal loan with cash savings to cover a larger total cost.
What to do next
Whether a personal loan makes sense depends on your own borrowing capacity, comfort with fixed repayment regardless of outcome, and how it compares to your other financing options for the same exercise. You can model your own exercise costs at movewealth.io.
MoveWealth is not a broker-dealer, investment adviser, or lender. This is educational content, not financial, tax, or legal advice. Consult a qualified professional about your specific situation.