When you’re looking to fund your business, you have to consider for your options of business loan vs personal loan. Both options have their own set of advantages and disadvantages, and understanding these can help you make an informed choice.
In this blog post, we’ll explore how each type of loan works, their uses, eligibility requirements, pros and cons, and how to decide which is better for your situation.
How Do Business Loans Work?
These type of loans are specifically designed to help businesses finance their operations, expansion, or other business-related expenses. These loans are typically offered by banks, credit unions, and online lenders. The loan amount, interest rate, and repayment terms can vary significantly based on the lender and the borrower’s creditworthiness.
Uses of Business Loan
These can be used for a variety of purposes, including:
- Purchasing inventory or equipment
- Expanding operations or opening new locations
- Managing cash flow
- Hiring staff or training employees
- Marketing and advertising campaigns
Eligibility Requirements for Business Loan
Eligibility for a business to get this loan depends on several factors, including:
- Business credit score
- Time in business (usually at least 1-2 years)
- Annual revenue
- Business plan and financial statements
- Personal credit score of the business owner(s)
Pros and Cons of Business Loans
Pros:
- Larger loan amounts available. In a Small Business Administration (SBA) you can borrow up to $2 million.
- Longer repayment terms, Small Business Administration have repayment terms as long as 25 years.
- There are several different types of these loans that may be more or less useful based on what you need the money for. These include SBA loans from the government, working capital loans to pay for operating expenses, equipment loans, and more.
- Interest rates are usually lower than personal loans. Traditional banks typically offer business loans at around 6% to 7% interest.
- Builds business credit
Cons:
- More stringent eligibility requirements. To get this loan, your business credit score and credit history are checked to see if qualify.
- Requires detailed documentation. You might need to wait several days or even weeks to get your loan approved by the lending institution.
- May require collateral such as a personal guarantee. That means you are personally liable to repay your business loan in case your company fails to pay it back.
How Do Personal Loans for Business Work?
Personal loans for business are loans taken out by individuals for business purposes. These loans are based on the individual’s personal creditworthiness rather than the business’s financial health.
Eligibility Requirements for Getting a Personal Loan for Business
To qualify for a personal loan, lenders typically consider:
- Personal credit score
- Income and employment history
- Debt-to-income ratio
- Loan amount and purpose
Pros and Cons of Using Personal Loan for Business
Pros:
- Personal loans are personal, so you can use them for almost anything, including startup business costs.
- Easier to qualify for, especially for new businesses
- Faster approval process. Depending on your lender, funds can be deposited within a day or two.
- No need for business documentation
Cons:
- Shorter repayment terms and time periods. Many lenders cap your repayment terms at 5, 7 or even 10 years.
- Smaller loan amounts. Most lenders cap the amount you can borrow at $40,000 or $50,000, which means that if you need more, you’ll need to look elsewhere.
- Higher interest rates. Right now average interest rate on a personal loan is more than 11%.
- Even if you use the money for business-related expenses, all those on-time payments won’t build up your business credit score.
- Personal liability for repayment
How to Decide Which Loan is Better for Your Situation
When deciding between a business loan and a personal loan, consider the following:
- Loan Amount Needed: If you need a large sum, a business loan might be more suitable.
- Business Age and Credit: New businesses or those with poor credit might find personal loans easier to obtain.
- Risk Tolerance: Consider whether you are comfortable with personal liability.
- Urgency: Personal loans often have a quicker approval process.
Key Differences Between Business Loan and Personal Loan
- Purpose: Business loans are specifically for business expenses, while personal loans can be used for any purpose.
- Eligibility: Business loans require business credit and financials, whereas personal loans rely on personal credit.
- Liability: Business loans are tied to the business, while personal loans are the individual’s responsibility.
Where to Go to Get a Business Loan or Personal Loan
- Business Loans: Banks, credit unions, online lenders, and Small Business Administration (SBA) loans.
- Personal Loans: Banks, credit unions, online lenders, and peer-to-peer lending platforms.
Summary
Choosing between a business loan and a personal loan depends on your specific needs, the amount required, your business’s financial health, and your personal creditworthiness. Business loans offer larger amounts and better terms but require more documentation and a strong business credit profile. Personal loans are easier to obtain but come with higher interest rates and personal liability.
Frequently Asked Questions
Q1: Can I use a personal loan for business purposes?
A1: Yes, personal loans can be used for business purposes, but you will be personally liable for the debt.
Q2: What is the maximum amount I can borrow with a business loan?
A2: The maximum amount varies by lender and depends on your business’s financial health and creditworthiness.
Q3: How long does it take to get approved for a business loan?
A3: Approval times can vary from a few days to several weeks, depending on the lender and the complexity of the loan.
Q4: Are interest rates higher for personal loans or business loans?
A4: Generally, personal loans have higher interest rates compared to business loans.
Q5: Can I build business credit with a personal loan?
A5: No, personal loans do not contribute to building business credit.