When considering what type of loan option works best for your business, a business loan is most likely the most “obvious” answer. However, that doesn’t mean that personal loans are out of the equation, and can be a workable option for some situations. To be honest, there are ups and downs to both business loans and personal loans when searching for the best financing option for your company, and there is a myriad of factors to consider before making a final choice.
If you’re weighing the pros and the cons of business loans vs. personal loans, you’ll also need to weigh the pros and cons of your business and personal needs. You’ll need to think ahead and identify potential pitfalls or achievements that could stem from your decision. With that being said, let’s get into the differences between personal loans, and business loans so that business owners like you can be better prepared for growth and success.
What’s a Small Business Loan?
When it comes down to getting a loan for business use, small business loans offer a great way to get the funding you need, fast. Whether you’re looking for a diverse loan option that can be used for a wide variety of business purposes, a small business loan is a great option.
Small business loans is a pretty broad term, and that’s because they serve a fairly broad spectrum of business opportunities. Whether you’re looking for purchasing equipment, working capital, marketing cash flow, or even new technology — small business loans can help. There are a ton of various loan options available too. For example:
- Term loans
- Equipment financing
- Invoice financing
- SBA Loans
- And more
A Brief Note on Term Loans
A business term loan is typically a lump sum of capital from a lender that you pay back with an agreed-upon or specified repayment schedule. These loans have either a fixed (or adjustable) principal and interest rate — and their terms vary in duration depending on the type of term loan it is. We’ll cover some of the basics below, but if you’re looking for a more in-depth look at short-term vs. long-term business loan solutions, check out our article.
Long Term Business Loans
Business loans with terms over two years in duration are considered long term business loans. These loans can have a wide range of rates (6.99% – 28%) based on credit history or financial conditions of business. Long term business loans require a significant amount of documentation due to attractive rates and terms. Approval rates are around 15-25%, so you’ll need a profitable and healthy business — along with sound credit to get approved. You’ll also need to have at least 2 years in business to qualify.
Short Term Business Loans
On the flip side of the term loans coin, you have short term business loans, which have a fixed lump sum offered upfront, along with a fixed payback amount over fixed terms of around 6-18 months. More traditional loan products can have some fairly stringent credit standards and documentation needs. However, short term business loans are a fantastic alternative, with less paperwork required and more lenient credit qualification standards.
What is a Personal Loan For Business?
Compared to a business loan, a personal loan for business is a much less complex endeavor. Personal loans require a look into your personal financial information, which may include your credit history and income. These loans are also usually unsecured, so there’s no need for collateral. Loan amounts are typically between $1,000 – $50,000 (or more), and last around 12-60 months. One of the most significant differentiators between personal loans for business and business loans is that if your business fails to pay back the funding, you become personally responsible for any outstanding balance.
Weighing the Pros and Cons
When considering any type of loan for your small business, it’s important that you’re doing the research. Whether it’s considering traditional vs. online lenders, or weighing the pros and cons of various business loan options — you’ll need to be diligent about where your cash flow is coming from. So, let’s look at some of the positives and negatives associated with both business loans and personal loans for business — to help give you the critical insights you need to make the right decisions down the line.
The Pros and Cons of Business Loans
Starting with the upsides of business loans, it’s a great way to separate your business finances from your personal ones. Sure, it seems like an obvious observation, but you would be surprised how many business owners find themselves in a world of trouble because they’re personal finances are interweaved into their business financials. As a business grows or expands, the separation between its expenses and your own becomes increasingly important — especially during tax season.
Now, another pro is that depending on the loan itself, business loans can limit your personal liability in the case that the business should default or undergo financial uncertainty or difficulties during a loan’s term. Alternative lenders are a great place to find these, as they offer a wide range of loan options with various conditions to boot.
Lastly, productive and responsible use of business loans can help boost a business’s credit score and credit history, which will help expand future financing opportunities. The better your business credit score is, the larger you’ll be able to grow — giving you access to higher lending limits, larger loan amounts, and trade credits with certain suppliers and vendors.
Now, there are some downsides or potential issues with business loans for your company — depending on certain conditions of course. Business loans can be tough to acquire if your business doesn’t have its own credit history or if your personal credit is poor. Also, it’s not uncommon for a business loan to be a lengthy and time-consuming process. When people are choosing between a business loan and a personal loan for business, it’s not uncommon for this to play a major role — as the potential mountain of paperwork and potential for rejection can seem daunting and difficult to manage.
Another potential con is that certain situations require a personal guarantee for a business loan, which means that you’ll be personally liable for repaying if the business defaults. For some, this is enough to call it quits — but it may be a far better option than alternatives. It’s all about weighing your personal goals and circumstances with the pros and cons we’ve mentioned.
The Pros and Cons of Personal Loans for Business
Compared with a business loan, a personal loan is far easier to obtain and qualify for. Personal loan lenders will usually only take a look at your personal credit score and finances when evaluating whether or not you’ll qualify. Compared with business lenders, who take a deep dive into your personal credit, business credit, business plan, and a wide range of additional financial statements — it’s a far less stringent process.
Additionally, personal loans are usually unsecured, which means you won’t have to fret about any collateral to obtain the loan. The lack of collateral can significantly reduce business loan opportunities. However, personal loans are a great alternative for many.
There are of course some issues with personal loans when it comes to funding for business purposes, and these come in the form of reduced lending limits and higher interest rates compared with business loans. Now, this is all dependent on the lenders you’re considering, however, it’s important to note, just in case. Weighing the possibility of higher interest rates and the inability to secure all of the financings your business needs is important, as it may start to eat away at chunks of your profit.
The other downside is that you’re not able to build business credit with personal loans. While personal scores play a major role in obtaining a wide variety of funding opportunities, building business credit opens up new doors, expands your options in lenders, and gives your business the flexibility it needs to grow alongside your goals. Additionally, if your business defaults and you’ve taken out a personal loan — it may negatively impact your personal credit score. This is a tough hole to dig yourself out of, as you’ll be juggling both a failing business and a poor personal credit score.
Obtaining a Business Loan vs. a Personal Loan
Now that we’ve covered some of the pros and cons associated with these two loan categories, let’s dive into the process of discovering and applying for both business loans and personal loans. There is certainly some crossover here, as certain pros and cons will inevitably play a part in the selection and application process, but there’s always more to learn.
Choosing and Applying for a Business Loan
There are a handful of steps you’ll want to take when finding a business loan and then attempting to qualify. These steps may differ depending on the type of loan you’re going for, the lenders themselves, and various personal and business circumstances — but there are some foundational aspects that remain the same. So, whether you’re through traditional loan options from banks or credit unions or alternative financing solutions like online lenders — you can make the process easier by preparing.
To get a business loan, here’s where you should start:
- Research various loans that are available for your business and identify which is a good fit for your business needs and current circumstances.
- Discover lenders that work with your business. Certain lenders have varying requirements, so before spending the time and energy applying, you can save yourself some trouble by figuring out ic you meet some minimum requirements. Whether it be the length of time in business, credit score, or minimum income.
- Identify rates and payments from various loan offers. You’ll see a fairly diverse range of APR, loan terms, fees, and monthly payments when considering various loan options, so it’s important to figure out which works for you and not against you.
- Organize your loan documents so that you’re prepared for the application process. Business loans require a ton of paperwork — and if you’ve followed this list, you’ll know what certain lenders require, so you’ll be better prepared for this step.
- Start applying for whichever business loan you’re going for. Depending on certain factors, like the lenders you’re considering or the type of loan you’re applying for — the application process can be fairly lengthy. It may take weeks for lenders to get through your finances and paperwork, and prequalification doesn’t always guarantee approval.
Choosing and Applying for a Personal Loan for Your Business
Depending on the lenders you’re considering, applying for a personal loan can be a fairly quick and painless process. It may only take a few days and can be a great way to secure the financing you need for your business. So, when applying for a personal loan — lenders will look at your personal financial information, which will include credit scores and income. This is a great alternative for business owners who haven’t had the opportunity to build their business credit and gives you some flexibility when applying for a business loan.
To get a business loan, here’s where you should start:
- Research minimum qualifications that specific lenders require. Lenders will have various minimum requirements that you’ll need to meet such as credit scores or minimum income.
- Compare loan terms through prequalification. These prerequisites will usually come in the form of soft credit checks, which is great because they won’t impact your credit score. This stage can also identify loan terms.
- Compare and contrast various loan offers. A personal loan inherently has lower borrowing limits compared to a business loan, so be sure that it’s enough for what your business requires.
- Complete the application process after you’ve chosen a lender that works for you. This formal application process will require a hard credit check and possibly additional supportive documents like pay stubs.
What Type of Business Loan Makes Sense for You?
Deciding Between a Business Loan vs. Personal Loan
When looking at a business loan vs. personal loan, there’s never a one size fits all answer as to what makes the most sense for your company. Instead, it’s all about doing the research, knowing what you need the money for, how much money you need, various requirements, and getting the best traction possible for your small business so that you can succeed.
A Business Loan May Be Right If
- Your company needs a significant amount of money.
- You want to protect your personal assets
- You want to build your business credit
A Personal Loan May Be Right If
- Your business doesn’t have a strong credit history
- Your business is fairly new
- You need money fast
- You don’t have any collateral
Now, these aren’t set-in-stone circumstances, but they’re important factors to consider when you’re trying to get money through financing for your business.
Alternative Online Lenders
If you’re having trouble getting the financing you need, online lenders are a great workaround for your business. Whether you’re a new business, have less than stellar credit, or you need cash flow fast — these lending opportunities offer a sound option for many business owners.
As entrepreneurship continues to grow and expand, new avenues for funding have become a necessity. That’s why online lenders have popped up left and right, opening up new doors for obtaining the money many new business owners or small businesses need for growth. Furthermore, these online lenders give you the flexibility you’ll need to obtain the personal loans or business loans you’re searching for. There’s a lot of red tape with traditional funding options, especially for new business-goers who may be struggling with their credit score or time in business. Even businesses with a longstanding history may have trouble going through traditional channels. That’s why online lenders are such a fantastic opportunity for both a personal loan or a business loan — with a wide range of interest rates and terms as well.
You can expect:
- Speedy approval
- Lines of credit up to $500,000
- Flexible repayment terms
- All personal credit scores considered
- A simple and painless application process
- Financing catered to your timeline
Through online lenders, you’ll have access to a broad spectrum of personal and business loan opportunities you’ll need to see your company grow.
- Business Term Loans
- Lines of Credit
- Invoice Factoring
- Merchant Cash Advance
- Business Credit Cards
- Equipment Loans
- And more
Frequently Asked Questions
We thought that it would be a great way to finish off this article on deciding between a business loan vs. personal loan by answering some of the most frequently asked questions we get about the two. Choosing between different loans tend to be a difficult and stressful choice.
Is it Easier to Get a Business Loan or a Personal Loan?
Obtaining a personal loan is definitely easier than its business loan counterpart. There’s far less paperwork involved and the time it takes to be approved is much less. It’s one of the more attractive reasons why so many individuals are drawn to personal loans. Additionally, lenders don’t tend to dive nearly as deep into your financials, which may include business expenses, business credit, business history, business plans, and other financial documentation on behalf of a business owner.
Can You Use a Personal Loan (or Loans) for Business?
Absolutely! Many businesses utilize personal loans to gain the traction they need, especially if they have a limited time in operation or haven’t built up strong business credit. There are of course some downsides to this, as many individuals would prefer to keep their personal finances separate from the business side of things.
What Type of Loan is a Small Business Loan?
A small business loan is considered a business loan. These can come in various forms, however, the most popular are long and short term loans. These differ in their repayment schedules and interest rates and can be a sound option depending on the use of money.
Can I Get a Personal Loan With a Poor Credit Score?
All-in-all, that really depends on the type of loan you’re going for, why you need the money, and where you’re borrowing the money from. Obviously, the better your credit score is — the more opportunities you’ll have. With that being said, online lenders offer a ton of flexibility for those looking to secure a personal loan with less than stellar credit histories. You may not get the interest rate you’re looking for, but these loans could be your only option.
Is a Personal Loan Easy to Apply For?
Yes, a personal loan is super-easy to apply for and requires far less paperwork than a small business loan. Applying for a personal loan, for personal and business purposes, requires a look at your credit score and income. Depending on if it’s secured or not, you may need collateral.
Is a Personal Loan Right for My Small Business?
That all depends on a few factors. If you’re looking for a faster and easier way to get cash, personal loans tend to be the way to go. With that being said, a personal loan won’t help keep your finances separate within the confines of your small business. In fact, it will do the opposite, and you’ll have some personal responsibility now attached to your small business endeavors. A personal loan can be a great option for new businesses that don’t have enough time in operation to meet certain requirements. It’s one of the biggest reasons why a small business may benefit from a personal loan.
What’s the Difference Between a Business Loan vs. Personal Loan?
Personal loans are typically unsecured loans vs. secured loans, which means you won’t have to worry about collateral. Furthermore, when differentiating between a business loan vs. personal loan, a personal one is usually around $1,000 – $50,000 (or more), and last around 12-60 months. It also leaves an individual with personal liability for the financing should the business default.