Small Business Loan VS Personal Loan: Which Should You Get For Your Business?
To make money, you must first have money.
This is the iniquitous catch-22 of entrepreneurship. There’s no scarcity of solid business ideas out there. However, when it comes to the funding necessary to actually take these ideas from inception to reality, a would-be entrepreneur’s options are limited and flawed. Despite America’s rhetorical veneration of the small business owner, rates of new business formation have been declining ever since the 1970s — evidence of an economic system that prioritizes pre-existing wealth over hard work and ingenuity.
It’s a lot to swallow for a new generation of businessfolk — one burdened by the exploitation of inflated rents and crushing student debt — to be forced by circumstance to consider debt financing. However, in an age where ideal solutions are nonexistent, loans remain one of the primary means of funding a business. For those launching a startup or running a new business, this typically means one of two things: seeking a business loan or a personal loan. Let’s compare and contrast these two approaches to see which option best fits your circumstances as you seek to turn your dream into a thriving enterprise.
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What Is A Personal Loan & How Can I Use It For Business?
A personal loan is a loan that is issued to you, personally, and not to any entity associated with you. Therefore, your ability to qualify for a personal loan — and, if so, the interest rate you will qualify for — is based solely on your own personal credit score along with other personal factors such as your income and credit history.
You can apply for a personal loan “offline” through a bank or credit union. For the sake of convenience, you might instead choose to apply for a personal loan from home through one of the many online lenders out there.
The personal loans offered by most loan vendors top out at about $50K — much smaller than the largest business loans (though it is possible to obtain a $100K personal loan from certain loan vendors). Term lengths typically run from one to seven years. And once you receive your personal loan, you can absolutely use it to fund your business operations, though you will have to disclose the intended purpose of your loan during the application process.
If you’re thinking of applying for a personal loan to fund your business, check out this article we wrote about personal loans and when/how to use them for business funding. You might also want to research some of the leading personal loan vendors.
What Is A Business Loan & How Can I Use It?
A business loan is a loan obtained by a business owner for the purpose of funding a business. As I will explain, business loans are more difficult to qualify for than personal loans, as business loans tend to be much larger than personal loans.
Due in part to the much larger amounts of money in play compared to a personal loan, the requirements for approval for a business loan are much more onerous. Essentially, you need to demonstrate the credit-worthiness of your business, not just yourself. Furthermore, if you apply for a business loan from a bank, you may well have to apply in person. However, just as with personal loans, there are online business lenders who won’t require your offline presence.
Business Loan vs. Personal Loan: How To Qualify
When you apply for a personal loan, even if you specify to the lender that you intend to use your loan to fund your business, the lender will determine your fitness for the loan by looking solely at your personal financial situation and not that of your business. Your personal credit score/history and income will be examined, and your debt-to-income ratio will likely be evaluated. If you qualify, both fixed and variable interest rates may be offered, and repayment periods range from 1 to 7 years.
Qualifying for a business loan is fundamentally different. While a business loan vendor will consider your personal credit in evaluating your worthiness for the loan, your business finances and business credit score will be examined as well and will be weighed even more heavily than your personal finances. Business tax returns, bank statements, and a detailed plan as to how you will use your borrowed funds will probably be required.
The extra work required speaks to the fact that borrowing amounts can be much greater with business loans than with personal loans. You can borrow more than $2 million with a business loan. In fact, you can borrow up to $5.5 million through a Small Business Administration (SBA) loan, though those loans can be difficult to obtain, particularly for startup companies.
When you apply for a business loan from a bank, you’ll probably need to apply in person and bring all your relevant business information with you. However, many online lenders offer business loans as well, and you may only have to submit your business’s financial details online.
Business Loan vs. Personal Loan: Rates & Terms
Borrowing Amount $2 million+ Max. $100,000 Term Length 6 months - 25 years 1 - 7 years APR 4% - 99%+ 5% - 36% Fees Possible origination fee, assessment fee, packaging fee, referral fee, guarantee fee, or others Possible origination/closing fee, application fee, referral fee, or others Collateral Possible personal guarantee, UCC-1 blanket lien, and/or specific collateral such as accounts receivable, real estate, or equipment Usually unsecured
Business Loan Personal Loan
6 months - 25 years
1 - 7 years
4% - 99%+
5% - 36%
Possible origination fee, assessment fee, packaging fee, referral fee, guarantee fee, or others
Possible origination/closing fee, application fee, referral fee, or others
Possible personal guarantee, UCC-1 blanket lien, and/or specific collateral such as accounts receivable, real estate, or equipment
When To Get A Personal Loan For Business
Business loans are very difficult to qualify for if you’re running a startup business with little-to-no business history. If you’re looking for a loan to fund your brand spanking new startup, you’re far more likely to be able to qualify for a personal loan. It also helps if you have excellent personal credit and you don’t mind putting your personal credit score on the line (because it will be).
Another factor to consider: You can be approved for a personal loan and get funded much more quickly than with a business loan. Business loan applications can take weeks or months to process, whereas when you apply for a personal loan, you can get approved and get funding in a matter of days. Remember this if time is of the essence.
You’ll also have to consider whether or not you’re willing to put up assets as collateral. Personal loan vendors typically do not require putting up collateral, while business loan vendors typically have collateral requirements. With a personal loan, you may be risking your credit score, but at least you won’t be risking having your hard-earned assets seized.
If you’re seeking a personal loan to fund your startup, have a look at our startup loan comparison page in which we compare some of the top vendors of personal loans.
Ready to apply for a personal loan for business?
|Lender||Borrowing Amount||Term||Min. Credit Score||Next Steps|
|$1K-$50K||3 or 5 years||8.16%-27.99%||620||Apply Now|
|$2K-$35K||3 or 5 years||6.95%-35.99% APR||640||Apply Now|
|$1K-$40K||3 or 5 years||5.32%-30.99%||640||Check Rate|
Is It Okay To Mix Personal And Business Finances?
When you’re trying to get your startup off the ground, it may not be possible to entirely separate your business and personal finances. Life can be messy like that. However, you should separate the two as soon as you can.
Consider setting up a separate business bank account for the funds obtained through your personal loan, and try to use said funds exclusively for business purposes. You’ll be glad you did, as this will greatly simplify your taxes and your accounting. If you want to learn more about keeping your business and personal finances separate for legal purposes, check out 12 Tips For Preventing A Tax Audit.
When To Get A Small Business Loan
If you’ve been running your business for two years or more, you’re far more likely to qualify for a business loan than if you have a shorter business history. It’s possible to get a business loan with just one years’ worth of business history, particularly with some online lenders (a few of which require only 6 months of business history), but it may be more difficult. If your startup is brand new and you have no business history, pursuing a business loan will probably be a futile endeavor.
It also helps to be making decent revenue. You’ll typically need a monthly revenue of at least $10,000 to qualify for a business loan, though some online lenders have more relaxed requirements.
Additionally, consider the amount of funding you need. The absolute maximum amount you can borrow with a personal loan is $100,000. If you need significantly more money than that for your business operations, you’ll want to apply for a business loan, as the borrowing amounts can be much higher. Also, if you’re looking for something other than a term loan, like invoice financing or an equipment loan, you’ll need to go to a business loan vendor.
If a business loan sounds right for you, check out our small business loan comparison chart where we compare leading business loan vendors.
Ready to apply for a small business loan?