Business Loan vs. Personal Loan: How To Choose
When deciding between a business loan and a personal loan, it’s important to consider your business history. Established businesses can usually get more capital with a business loan while keeping their business and personal assets separate. However, a personal loan may be a better choice if you find that you’re unable to meet standard business loan requirements. Here’s what you need to know when weighing your options.
Business loan vs. personal loan: At a glance
| Business Loan | Personal Loan | |
|---|---|---|
| Best for | Business owners who are more established and can meet the eligibility criteria for a standard business loan | Business owners who can’t meet the standard business loan requirements and need to find an alternate form of funding. |
| Eligibility criteria |
|
|
| Loan amounts | Up to $5 million+ | Up to $200,000+ |
| Term lengths | Generally up to 25 years | Generally up to 5 years |
| Interest rates | Usually lower | Usually higher |
| Tax deductible | Yes | No |
| Are you personally liable for the debt? | Yes, in some cases | Yes, in all cases |
How do small business loans work?
Small business loans provide the funding that your business needs. A loan might fund purchasing equipment, making payroll or investing in marketing or new technology. Because business needs are so diverse, you’ll find a number of different loan options available, including term loans, equipment financing, invoice financing and loan options from the Small Business Administration (SBA).
Business loans can be short- or long-term and may require you to submit a lot of paperwork about your business, including financial statements and financial projections. They can be both secured and unsecured, and your ability to qualify will usually depend on both your business and personal credit history.
Business loan terms can range from just a few weeks, like with invoice factoring, to up to 25 years for SBA loans used to purchase real estate. Amounts can vary as well, with loans for small businesses up to $5 million or more. Some banks even offer large commercial loans up to $1 billion.
How do personal loans for business work?
A personal loan for business use is a bit simpler than a business loan. With a personal loan, your personal financial information will be reviewed, including your income and your credit history. Loans are typically unsecured, meaning you don’t need collateral. The loan amounts offered are generally between $$600 to $200,000 and typically have repayment terms of two to five years.
When it comes to using a personal loan for business expenses, however, one notable downside is that if your business fails to pay back the loan, you’ll be personally responsible for paying the outstanding loan balance.
Pros and cons of using a business loan
Pros
- Business loans can help separate your business and personal finances, which is particularly important as the business grows (and when it comes to tax time).
- Business loans may limit your personal liability in the case your business defaults or encounters other financial difficulties during the loan term.
- Responsible use of business loans can help build your business credit history and credit score, which will open doors for other opportunities that can help you grow and expand, such as higher lending limits and trade credit with vendors and suppliers.
Cons
- Business loans can be difficult to obtain if your business isn’t established. Lenders often require anywhere from 3 months to 2 years of business history for borrowers.
- A personal guarantee may still be required for your business loan, meaning that you are personally liable for repaying the loan if the business defaults.
Pros and cons of using a personal loan for business
Pros
- Personal loans can be easier to obtain than business loans. Lenders will usually just take a look at your personal credit score and finances when deciding whether to lend to you. Business lenders, however, will likely examine both your personal credit and business credit, total time in business and annual revenue.
- Collateral is usually not required. Another benefit of using a personal loan for business purposes is that personal loans are usually unsecured – some business loans require collateral
Cons
- Lending limits can be lower with personal loans compared to business loans, depending on the lender. You may not be able to secure all the money you need with a personal loan.
- By using a personal loan for business purposes, you are denying your business the opportunity to build its own credit, which can help you obtain additional financing options as the business grows.
- If the business defaults, your personal credit will take a hit. A failing business and delinquent personal credit score can be difficult to recover from.
Getting a business loan vs. a personal loan
Finding and applying for a business loan
Getting a business loan can be a complex process. In addition to a lender reviewing your personal credit score, they’ll also want to review additional information including your business credit history, your business and personal financial statements, information on any collateral for the loan and how you plan to repay the loan.
When it comes to finding a business loan, you have a lot of options including banks, credit unions and online lenders.
To find a business loan, you’ll want to:
- Research the loan types available to you. Because there are so many different loan options available, you should take the time to see what best fits your business needs.
- Find lenders. Each lender will have different requirements, so before applying, make sure you understand the requirements you might have to meet.
- Compare APR and monthly payments. When comparing loan offers look at the APR, loan term, fees and monthly payment. Some lenders use simple interest rates or factor rates, so calculate the total cost of borrowing when comparing lenders with different rate types.
- Prepare your loan documents. Loan applications require a lot of paperwork, so once you know what lenders you’d like to apply for a loan with and what they require, it’s time to start pulling together the important documents you need.
- Apply. The business loan application process can take weeks as lenders do a deep dive into your finances. Keep in mind, though, that just because you’ve prequalified with a lender doesn’t mean you’re guaranteed a formal approval.
Finding and applying for a personal loan for business
Applying for a personal loan can take a matter of a few business days, or as little as one depending on the lender. When you apply, the lender will consider your personal financial information, including your credit score and income. So, if you need funds for business expenses but haven’t established your company’s credit, you can lean on your personal credit when applying.
If you want to find a personal loan for your business, you’ll have the option of choosing a bank, credit union or online lender. To find a personal loan:
- Review minimum qualification requirements. As you research lenders, you’ll find that they may have different minimum criteria you need to meet to qualify — like a specific required credit score or a certain minimum income. Note that some lenders won’t allow personal loan funds to be used for business purposes, so do a quick check for that, as well.
- Apply for prequalification. Many personal loan lenders make it easy to compare loan terms through the prequalification process, which only requires a soft credit check, so it won’t affect your score. Prequalification can reveal the loan terms you may get after the formal application process.
- Compare loan offers. Because personal loans often have lower borrowing limits than business loans, you’ll want to make sure that you’re able to borrow enough for your business needs. You’ll also want to review the APR and monthly payments for each loan and think about your repayment plan and each lender’s fee structure.
- Apply. Once you’ve chosen a lender, you’ll submit a formal application. This often will trigger a hard credit check. The lender may also require you to provide supporting documentation, such as pay stubs.
Should I get a business loan or a personal loan?
When a business loan can make sense
- If you need to borrow a lot of money, a business loan will likely be a better option, as lending limits are significantly higher on a business loan versus a personal loan.
- If your business is at least 6 months old, you’ll be more likely to qualify for a business loan, which may help you save on interest.
- If you want to build your business credit, a business loan can help you do that.
When a personal loan for business can make sense
- If your business is new and hasn’t built a strong credit history or annual revenue yet, you may have a better chance of being approved for a personal loan because that’s based on your personal financial history.
- If you need money quickly, some personal loan lenders can offer quick funding within one business day, rather than in the days, weeks or months you may have to wait with some business loans.
- If you don’t have collateral — or don’t want to use collateral — a personal loan may be a good bet, as most personal loans are unsecured, especially if you own a newer business.
Compare business loan offers
- Business loan vs. personal loan: At a glance
- How do small business loans work?
- How do personal loans for business work?
- Pros and cons of using a business loan
- Pros and cons of using a personal loan for business
- Getting a business loan vs. a personal loan
- Should I get a business loan or a personal loan?