Almost everyone can get a personal loan, and it can be used for anything. You may be required to put up collateral when applying for a business loan, and these loans are typically tailored to a particular undertaking or necessity. Key distinctions include eligibility requirements and restrictions on loan proceeds.
Knowing if a company loan or a personal loan is the better option can be challenging. Although there are some similarities between the loans, there are also important distinctions that can help you choose the right loan for your needs.
Personal loans
A personal loan is a lump sum of money borrowed from a financial organization (bank, credit union, etc.). You are free to put a personal loan toward any use you desire, but you must repay the principal plus interest by the agreed-upon due date each month for the duration of the loan.
How a personal loan works
A borrower can acquire a personal loan from a bank or other lending institution for a certain sum. Your credit score, along with other factors including your income and your ability to guarantee the loan with collateral, will determine whether or not you are approved and at what interest rate you are offered. A “secured” personal loan, in which you put up collateral in case you can’t make your loan payments, usually means a lower interest rate for you.
You can utilize a personal loan for anything from paying for a car to covering unforeseen costs to funding your college degree. Personal loans are often repaid according to a predetermined plan. The length of time you have to repay the loan is also fairly lender-specific; it could be anywhere from one to seven years.
Pros of Personal Loans
- Almost anything can be carried out with it. Because personal loans are private, you can use them for nearly anything, including initial business expenses. However, you can also utilize that money for expenses unrelated to your firm.
- Rapid approval. Most personal-loan lenders have a pre-qualification process that allows you to determine if you’re eligible without submitting a full application (which needs a hard inquiry, resulting in a temporary drop in your credit score). You’ll usually find out right away if you’re authorized after completing the real application.
- Quick financing. Funds might be deposited within a day or two, depending on your lender.
Cons of Personal Loans
- Repayment terms and loan amounts are being lowered. Loan terms vary by lender, but many cap your repayment terms at five, seven, or even ten years. If you need to borrow a large sum of money, say $100,000 or more, your monthly payments may be too expensive. Most lenders cap the amount you can borrow at $50,000 or $60,000, which means you’ll have to search elsewhere if you need more.
- Higher interest rates. Personal loans typically have higher interest rates than commercial loans. At the moment, the average interest rate on a personal loan is more than 11%. Traditional banks normally charge 6% to 7% interest on business loans.
- It is more difficult to establish company credit. A personal loan can help you improve your personal credit score and history, but it won’t benefit your business. Even if you spend the funds for company-related purposes, making on-time payments will not improve your business credit score.
Business loans
Business loans, like personal loans, are large sums of money borrowed from a bank (or other lending institution or government agency) and repaid with interest over time. A business loan, as opposed to a personal loan, can only be used for things like expanding operations or advertising.
How a business loan works
Strict standards must be met, and your business must be profitable, before you can apply for a business loan. Additional documents, such as a business plan, financial statements, personal and company credit histories, and more, may be requested. The time it takes to get approval for a business loan might be lengthy due to the extensive paperwork involved. Don’t count on getting easy company financing.
A company loan, like an individual loan, may be secured or unsecured, and its interest rate may be set or variable. In addition, you must return the loan in accordance with the terms specified in your commercial credit agreement.
Pros of Business Loans
- Longer repayment terms. The Small Business Administration (SBA) offers loans with repayment lengths of up to 25 years.
- Higher maximum amount. SBA loans allow you to borrow up to $2 million.1 Some banks and lenders have maximum amounts that are more or lower than the SBA amount.
- Different loans are available to meet a variety of purposes. There are several forms of company loans that may be more or less effective depending on your needs. These include federal SBA loans, working capital loans to cover operating expenses, equipment loans, and more. Different lenders provide different sorts of business loans, so you can choose the one that is best for your firm.
Cons of Personal Loans
- A higher qualification threshold is required. To determine eligibility for business loans, your business credit score and history are reviewed. If your company has no credit history, you may have a more difficult time applying for a business loan.
- It may take longer to obtain. You may have to wait several days or even weeks for your company loan to be authorized. If you require funds immediately, this may be too long.
- You may require a personal guarantee. A personal guarantee on a business loan means that you personally agree to repay the loan if your company fails to do so. This implies that your personal credit score and history are scrutinized, and if you are unable to repay the loan, your credit score will suffer.
Key Differences Between Personal and Business Loans
Uses
A business loan can be used for a variety of business-related needs, such as wages, equipment, and starting money.
A personal loan can be used for both personal and business purposes, which you may need if your business is just getting started.
Where can I obtain one?
Many banks, credit unions, and online lenders offer both personal and commercial loans. Some banks may offer business loans, while others may offer more broad lines of credit.
Amounts of Loan
The amount of money you may anticipate obtaining from a personal loan varies depending on the lender; however, it can range from $1,000 to $40,000 or $50,000.
Business loan funding varies according to lender. Some offer as much as $500,000, while others offer much more, such as $2 million or even $5 million.5
Eligibility
Your credit score and history determine your eligibility for a personal loan. The higher your credit score, the more likely you are to qualify for the best attainable interest rate. The lower your score, the less likely you are to get accepted.
Your company’s business credit score and history determine its eligibility for business loans. If your company is still in its early stages, you may not have these. Some banks evaluate your personal credit score and history to determine loan eligibility, but you may be required to sign on as a personal guarantor, which means you’re personally liable for repaying the loan if your business is unable to.
Collateral
Some personal loans are secured in the sense that you can use an account for savings or a certificate of deposit (CD) as collateral, but your loan limit is typically determined by the balances in these accounts. Although the majority of business loans are unsecured, some lenders do offer secured business loans. Typical collateral for secured business loans includes business assets such as real estate, equipment, and inventory.
Rates of Interest
Personal loans typically have higher interest rates than commercial loans. Personal loan interest rates are at around 11.5%, while business loan interest rates are just over half that figure.
Loan Duration
A personal loan might be taken out for three, five, or even seven years. Depending on the objective of your loan, some lenders will provide longer periods of up to 10 or even 12 years.
While some business loans are short-term and must be repaid within one to five years, many business loans have terms comparable to mortgages (i.e., up to 25 or even 30 years). Repayment terms can vary because there are so many different forms of business loans.
Tax Advantages
Personal loans have no tax advantages. The interest paid on business loans may be tax-deductible, depending on where you live.
Can I utilize a personal loan for business purposes or vice versa?
While you can use a personal loan for some business-related expenses, you can’t always use a business loan for personal requirements. There are some workarounds, such as if the purchase of a specific item or requirement has a direct impact on your business. This is illustrated by purchasing a phone to communicate with consumers but also for personal use.
Can the same lender provide a personal loan and a business loan?
Yes, you can obtain both a personal loan and a business loan from the same lender, provided it offers both types of loans. You may have a greater chance of approval if you do business with an institution that can evaluate your current standing to determine your eligibility.
What is the distinction between a line of credit and a business loan?
A line of credit can be used in the same way as a credit card. You are able to take money out of the account whenever it is necessary and then pay it back on a regular basis. A business loan is a one-time payment that is transferred into the bank account of your company. From this account, you will continue to make the required minimum payments on the loan until it is paid off in full.
Should I get a business loan or a personal loan?
When it makes sense to get a business loan
- If you need to borrow a large sum of money, a business loan is likely to be a better alternative because lending limitations on a business loan are substantially higher than on a personal loan.
- If you don’t want to risk your personal assets, a company loan without a personal guarantee is a better option than a personal loan.
- Some alternative lenders may provide loans without requiring a personal guarantee. A business loan might assist you in building your company’s credit.
When it makes sense to get a personal loan
- If your company is new or hasn’t yet established a solid credit history, you may have a greater chance of being approved for a personal loan, which is based on your personal financial history.
- If you need money urgently, certain personal loan lenders can provide funding within one business day, as opposed to the weeks or months that other company loans may require.
- If you don’t have collateral or don’t want to utilize collateral, a personal loan may be a decent option because it is typically unsecured.
Summary
Personal loans and business loans are both options for financing the costs associated with running a business; however, the type of financing that is most suitable for your requirements, both professionally and personally, is the personal loan. Before you fill out the application in its entirety, you should, if at all feasible, research the available programs to determine which ones offer the most favorable payback conditions.
