Personal Loan vs. Business Loan

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Every small business will require some kind of working capital, which is why it’s important to understand the distinction between a personal loan vs. business loans. Technically speaking, both of these loans can be used to fund your business, but they offer unique advantages and disadvantages for business owners.

Today, we’ll explore these loan options and discuss the difference between personal loan and business loan interest rates and more.

A Personal Loan vs. Business Loan

Many business owners choose to fund their business using personal loans, especially in the early days of their businesses. The reason is simple: personal loans are often easier to obtain than a business loan. This is especially true when your business is in its infancy and lacks the credit history required to obtain a business loan.

When you apply for a personal loan, your lender will review your financial information, including:

  • Your income
  • Your credit history
  • Your assets

The good news is that personal loans tend to get approved relatively quickly – sometimes even in 24 hours or less.

Business loans, by contrast, will require a bit more review. A lender will likely need to examine:

  • Your company name
  • Your foundational documents
  • Your company’s financial history
  • Your business credit score
  • Your business assets

Business loans tend to be harder to get, though they often come with additional perks.

A personal loan might be best for business owners who:

  • Are just starting out
  • Need a loan of $50,000 or less
  • Have the financial means to repay the loan

On the other hand, business loans are better suited to entrepreneurs who:

  • Need large loan amounts
  • Want to avoid personal liability for the loan
  • Need the additional merchant services offered by the lender

Another difference between personal loan and business loan application processes? Business loans take longer to approve. With this in mind, business owners should think carefully about which loan type most suits their business needs.

How Do Personal Loans Work?

Personal loans are among the most straightforward ways to fund your business.

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What Are Personal Loans?

Personal loans are issued by banks and lenders directly to individuals. Loan amounts can vary, but they generally fall in the range of $1,000 to $50,000, though you may qualify for higher amounts based on your financial history. The loan term generally lasts between 12 and 60 months.

What Can I Use a Personal Loan For?

Personal loans are not typically connected to a specific financial necessity. This means that you can use a personal loan for expenses such as:

  • Debt consolidation
  • Home improvement projects
  • College/educational funding
  • Purchasing a car/home

Some lenders may attach additional stipulations regarding how a personal loan is used, but generally, you can expect to use this money for any expenses you deem necessary.

Pros and Cons

There are some pros and cons of a personal loan. On one hand, personal loans offer several advantages:

  • They can be obtained quickly
  • They offer low interest rates
  • They can be used for a variety of needs

But on the other hand, there are some disadvantages to personal loans:

  • They tend to be smaller in value
  • Lenders don’t offer merchant services
  • You are personally liable for repaying the loan

In many instances, the pros outweigh the cons, but you’ll have to carefully consider whether a personal loan is right for funding your business.

How to Apply for a Personal Loan

To apply for a personal loan, simply contact a local bank or trusted lending institution. The lender will likely review such information as:

  • Your current assets (bank statements and tax returns can verify this)
  • Your income
  • Your most recent credit report

Personal loans are unsecured loans, which means you won’t have to put down any collateral, such as your house. Personal loans are generally approved within 1-2 business days.

How Do Business Loans Work?

Business loans follow the same general process, but they are designed to be used for business purposes.

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What Are Business Loans?

Business loans are issued by a bank to a business, in the care of a company owner or designated representative. These loans can be in varying amounts, but they are typically much larger than personal loans.

What Can I Use a Business Loan For?

While personal loans can be used for a variety of needs, business loans are typically designated for specific business needs. Some loans, such as equipment loans, are designed to purchase specific items and tools.

Pros and Cons

Business loans offer several advantages:

  • Larger loan amounts
  • Owners are not personally liable for repaying the loan
  • Many lenders offer additional merchant services

On the other hand, there are some disadvantages to business loans:

  • It can be harder for new businesses to qualify
  • Interest rates can be high
  • Loans can only be used for business purposes

This can make business loans well-suited for some purposes, but they can also be out-of-reach for new businesses and startups.

How to Apply for a Business Loan

To apply for a business loan, simply contact your preferred financial institution. They will review your company’s information, including:

The review process can take a bit longer than a personal loan. 

Difference Between a Personal Loan and Business Loan 

How can you compare a personal loan vs. business loan? There are several key differences:

  • Personal loans are for smaller amounts
  • Owners are personally liable for personal loans
  • Business loans have higher interest rates
  • Business loans include merchant services and other assets

If your business wants to take advantage of a business credit card or other merchant service, a business loan might offer the better solution.

Personal Loan vs. Business Loan Rates

What about business loan interest rates vs. personal loan interest rates? Business loan interest rates tend to be as high as 2% to 13%, while personal loan interest rates can be as high as 36%.

The reason that personal loan vs. business loan rates are so different is that in a personal loan, the recipient of the loan is required to repay the loan. Banks charge higher rates to recoup their losses in the event that the borrower can’t pay their loan.

Can I Use a Personal Loan for My Business?

You can normally use a personal loan for business expenses, though some lenders attach additional stipulations that might prevent you from doing so. Always ask your lender before applying for the loan.

Making the Choice Between a Personal Loan vs. a Small Business Loan

How do you choose which type of loan to use? Each loan makes sense in specific circumstances.

Personal loans make the most sense for businesses that:

  • Are just starting out
  • Need smaller loan amounts
  • Can repay their loans quickly

On the other hand, business loans are ideal for companies that:

  • Have a solid credit history
  • Need higher loan amounts
  • Need to access additional services from lenders

Business owners will have to determine which loan type best suits their needs.

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