Small Business Funding 101: Personal Loan vs. Business Loan
by Fundid on Dec 27, 2021 3:13:00 PM
Most small businesses will require some kind of working capital during their entrepreneurial journey. If you're looking into capital as an option for your business, it's important to understand the distinction between personal loans and business loans. While both types of borrowing can give you access to funds that allow you to create or expand your company, there are key distinctions in terms of eligibility requirements, restrictions on how they can be used, and repayment terms. To ensure you make an informed decision when it comes time to borrow money for your small business, we created this essential guide that weighs the advantages and disadvantages of each loan!
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 business loans. This is especially true when your business is relatively new 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 the following:
- 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:
- Just started their business
- 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 for those who:
- Need large loan amounts
- Want to avoid personal liability for the loan
- Need the additional merchant services offered by the lender
Related Reading: A Business Owner's Guide to Business Loans
Another difference between a 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 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 are issued by a bank, credit union, or alternative lender 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
- Specific financing options for your business
- 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
- Revenue requirements can be higher
- 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, browse our capital marketplace or contact your preferred financial institution. Make sure you have everything ready to help expedite the process. Lenders will review your company’s information, including:
- Your company's financial history
- Your assets
- Your articles of formation
- Your business credit score
The review process can take a bit longer than a personal loan.
Difference Between a Personal Loan and a Business Loan
How can you compare a personal loan vs. a 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 you are interested in taking advantage of a business credit card or other merchant service for your business, a business loan might offer a better solution.
Personal Loan vs. Business Loan Rates
Interest rates are a major factor to consider, and it's important to note that rates for business loans tend to be lower than those for personal loans. Additionally, business loans often come with larger loan amounts and longer repayment periods, giving business owners the time and resources they need to grow their business without worrying about personal financial obligations.
It's important to carefully consider the terms and conditions of each loan and how they fit with your business needs and goals. Speaking with a financial advisor can help you determine the best loan option for your business. Remember, the goal is to find the loan that fits your business's financial situation, not just the one with the lowest interest rate.
Can I Use a Personal Loan for My Business?
While it is possible to use a personal loan for your business, you'll need to carefully consider the risks and benefits before making a decision. Personal loans typically have higher interest rates than business loans, which can make them more expensive in the long run.
Additionally, using a personal loan for business purposes can put your personal credit at risk if your business is unable to repay the loan. However, if you have a strong credit history and are confident in your ability to repay the loan, a personal loan can provide you with the funds you need to start or grow your business. As with any financial decision, it's important to do your research and consult with a professional before taking out a personal loan for your business.
Deciding 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:
- 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.
Find Business Funding with Fundid
Need funding to grow your business? Get loan offers that meet your specific business needs from several funders through our Capital Marketplace. With over 15 different loan options, find the funding the will work best for your business needs. Explore your options.