When seeking funding for your business, you may be stuck choosing between a business loan or personal loan for business. Learning the differences between the two can help you make the right choice.
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Before you start your search for the right lender, there’s one important decision you need to make: will a business loan or personal loan better suit your needs?
In this post, we’re going to look at the pros, cons, and key differences between personal loans versus business loans. With this information, you’ll be able to make the choice that’s best for your financial situation.
What Is A Personal Loan?
A personal loan is money that is borrowed from a bank, credit union, online lender, or other institution. Payments are made on a scheduled basis over a set period of time until the principal (borrowed) amount is repaid, plus fees and interest charged by the lender.
While a personal loan is generally used for personal expenses (such as paying bills, car repairs, vacations, or emergencies), some business owners opt to take out a personal loan to use for business purposes.
These loans typically don’t require collateral, can be used for any reason, and can be obtained completely over the phone or online from non-traditional online lenders.
Benefits Of Personal Loans
- Easier To Get: Personal loans typically have fewer qualification and documentation requirements for applicants.
- Typically Doesn’t Require Collateral: Personal loans are usually unsecured, so a lack of collateral won’t prevent you from getting the loan you need for your business.
- Universal Use: There are typically fewer restrictions on how personal loans are used. You can use funds for business and personal expenses.
- Potentially Better Rates & Terms: Newer businesses and startups with a lack of credit history may score better rates and terms with a personal loan, provided they have a strong personal credit history.
- Fast Funding: Some lenders offer same-day or next-day funding, which is ideal for borrowers that need access to quick cash.
Disadvantages Of Personal Loans
- Lower Borrowing Amounts: Unsecured personal loans often have lower borrowing limits than small business loans.
- Higher Interest Rates: Personal loans often have higher interest rates than business loans.
- Shorter Repayment Terms: Personal loans generally have repayment terms up to seven years, which is much shorter than many traditional business loans.
- No Opportunity For Business Credit Growth: Personal loans can boost your personal credit score but aren’t reflected on your business credit score. Without strong business credit, it will be difficult to qualify for traditional business loans in the future.
What Is A Business Loan?
Similar to personal loans, business loans are funds that are borrowed from a financial institution or other lender. However, borrowers must own a business and must use loan proceeds on approved business expenses.
There are various types of business loans, including short and long-term loans, equipment loans, SBA loans, and commercial real estate loans. Business loans can be obtained from traditional lenders (such as a bank) or through an online alternative lender.
Personal guarantees and/or collateral are typically required as a condition of receiving a business loan. You will have to also specify how you plan to use funds since loans must be used for business purposes.
Advantages Of Business Loans
- Less Personal Responsibility: In some cases, your personal assets won’t be at risk if you default on a business loan. This isn’t always the case, however, as many lenders require businesses to sign a personal guarantee. You may also be required to use personal assets as collateral for your loan.
- Builds Business Credit: A business loan can help start or improve your business’s credit history. This will help you obtain larger business loans with more favorable terms in the future.
- Higher Borrowing Amounts: Business loans have higher borrowing limits, with some lenders offering millions of dollars to qualified borrowers.
- Specialized Support: When you apply for a small business loan, you’re automatically connected to a group of people who are experienced in working with business owners. With a personal loan, you might not get the same tailored customer service and support you would from a team of business loan professionals.
- Longer Repayment Terms: Business loans have longer repayment periods than personal loans, with some options offering 25+ year terms.
Disadvantages Of Business Loans
- Credit History Barriers: While business loans are great for building your business’s credit history, newer businesses with a lack of business credit history may have difficulty qualifying for higher loan amounts and lower interest rates.
- Rigid Requirements: In addition to personal and business credit history requirements, lenders also typically have time in business and revenue requirements that must be met.
- Lengthy Application Process: Since you’ll have to provide business and personal information and documentation, the application process for a business loan can be time-consuming.
- Time To Get Funds: While some alternative lenders offer same-day and next-day funding, other business loans may take a while to disburse. For example, the SBA loan approval process can take several months from start to finish.
- Personal Guarantee Or Blanket Lien: In addition to collateral, business loans may also require a blanket lien, which covers all of your business assets, as well as a personal guarantee.
The Key Differences Between Personal Loans VS Business Loans
Exploring the pros and cons of business loans and personal loans should give you a good idea about some of the differences between these two types of funding. But let’s break these differences down further to help you decide which option is right for you.
Application Process
In most cases, the application process for personal loans is going to be much faster than it is for business loans. The business loan application process is typically more detailed and requires additional documentation that isn’t necessary for a personal loan.
Borrower Requirements
Borrower requirements are quite different for business loans and personal loans. Personal loans only require personal information, including credit score and income.
Business loans may require business documentation such as past income tax returns, financial statements, and a business plan. Borrowers will also have to meet personal credit, business credit, revenue, and time in business requirements set by the lender.
Collateral
Specific collateral isn’t required for unsecured personal loans, although you will be held personally liable if the loan goes into default.
For a business loan, specific collateral, a personal guarantee, and/or a blanket lien may be required, which could put your business and personal assets at risk if you’re unable to repay the loan.
Distribution Of Funds
Funding timelines vary by lender, but in many cases, a personal loan hits your bank account faster than a business loan. An exception is for smaller business loans through non-traditional lenders.
Interest Rates
Interest rates tend to be higher for personal loans, especially if you don’t have a strong credit history.
On the other hand, borrowers with good to excellent personal credit that have a new business may find lower rates with a personal loan than with alternative business lenders.
Repayment Terms
Repayment terms vary by lender, but personal loans typically have much shorter repayment terms. A personal loan usually has repayment terms of less than 10 years, while some business loans offer repayment terms of 10, 20, or 25+ years.
Personal Loan VS Business Loan FAQs
Can I use a personal loan for my business?
Yes, you can use a personal loan for your business. However, you will have to meet certain requirements to get the best rates and terms. Additionally, you will be held personally liable if the loan goes into default.
Can I use a business loan for personal reasons?
A business loan can’t be used for personal expenses. Business loans can only be spent on specific business expenses based on the lender’s policies.
Should I get a personal loan for my business?
You should get a personal loan for your business if you don’t meet the requirements for a business loan. With a strong personal credit history and income, you may be able to receive higher borrowing amounts and better rates and terms.
What's the difference between a personal and business loan?
A personal loan can typically be used for business or personal expenses, while a business loan can only be used for specific business purposes. Business loans often have lower interest rates and longer repayment terms but a more complex application process.
The Bottom Line On Personal Loans VS Business Loans
When it comes to loans, every business has unique needs. What works for one business might not work for your own. Before even seeking out a lender, determine if your business can afford a loan and if the loan will truly help your business grow. Then, carefully weigh out the pros and cons of business loans versus personal loans to find the best match for your specific circumstances. Finally, you’ll be ready to find a lender to fund your loan.
Once you’ve decided to move forward with a loan, make sure to do your research and compare rates. Start your search with our top personal loans and best business loans to find the best option for your business.
