We present methodologies to functionalize iron oxide (Fe3O4) nanoparticles with biosurfactants and biocompatibility results. Positively charged Fe3O4 nanoparticles of average hydrodynamic size -26 nm is functionalized with four different molecules of interest, viz., surfactin, rhamnolipid, polyethylene glycol (PEG) and dextran. The functionalization results in dramatic alterations in surface potential and hydrodynamic size due to the presence of coated moieties on the nanoparticle interface. The Fourier transform infrared spectroscopy and thermogravimetric analysis confirm the presence of adsorbed moieties on nanoparticles. The phase contrast microscopy studies show the formation of reversible chains of functionalized nanoparticles under an external magnetic field. Cell viability studies using L929 mouse fibroblast cell line show that pure surfactin, rhamnolipid and dextran exhibit cytotoxicity with increase in concentration, whereas, pure PEG exhibit biocompatibility at different concentrations. Accordingly, surfactin and rhamnolipid coated nanoparticles are found to be cytotoxic with increase in concentration and PEG coated nanoparticles are found to be biocompatible. Dextran coated nanoparticles do not exhibit significant increase in biocompatibility.