Key Differences Between Business and Personal Loans
December 29, 2021 | Last Updated on: July 26, 2022
December 29, 2021 | Last Updated on: July 26, 2022
Are you a small business owner in need of some cash but unsure if a business loan or personal loan is your best bet? The right fit will depend on a few factors including what you qualify for and which loan product offers the best overall value for your situation.
Let’s take a closer look at the differences between personal loans and business loans, and how to decide which is best for you.
Both business and personal loans can provide entrepreneurs with a loan amount to grow their ventures. However, they vary when it comes to the loan types available, eligibility requirements, and more. Here’s a closer look at both options.
Personal loans are a credit product extended to individuals for their personal use. You are not required to be a business owner to get a personal loan but you usually have to prove that you have a source of income.
Personal loans can be used for a wide range of purposes from paying off expensive debt and making home improvements to helping to cover business expenses. As long as the lender doesn’t restrict a particular purpose and it’s not illegal, you have free rein with how you use the funds.
To qualify for a personal loan, you’ll need to fill out a loan application with a lender and share your personal information including your name, address, social security number, personal finances, and proof of income.
During the application process, you may also need to submit the following documents:
Personal loan lenders usually assess your personal credit score, debt-to-income ratio, and income stability to decide if they will lend to you or not. The amount of risk you present will determine if you get approved, the loan amount you can get, your interest rate, and possibly the fees you’ll have to pay. For example, if you have a fair credit score of 600, you may get approved but will have to pay more for the loan than someone with a good or excellent credit score in the high 700’s. The better your credit and financial situation, the higher the loan amount and lower the interest rate you’ll likely get.
When looking into personal loans, you’ll typically come across two main financing options:
In addition to these types of loans, the terms of personal loans can vary. For example, loans may be unsecured or secured. Secured loans use a borrower’s property as collateral for the loan while unsecured loans rely on the borrower’s creditworthiness. Additionally, personal loans may have fixed or variable interest rates, and some may be marketed for a specific purpose like debt consolidation or home improvement. A student loan is also technically a personal loan.
Now, let’s move on to business loans. Business loans are loans that are extended from lenders to business owners to be used for business purposes.
Typically, lenders like to see business loans invested in an initiative that helps to grow the business and increase revenue. For example, business lenders may ask what you need the money for with options, including:
Be sure to check with your lender for approved loan uses and any restrictions that may apply.
To qualify, you’ll typically have to meet eligibility requirements related to your annual revenue, time in business, personal credit score, and possibly business credit.
Lenders will often request the following documents during the application process:
Most lenders will only approve established businesses. Startups and new business ventures will often have more trouble getting a business loan, however, the SBA does have some programs available.
That said, eligibility requirements vary from one lender to the next so be sure to check them out. Just because one lender denies you doesn’t mean the next one will. Some are more flexible than others. Further, if you’re concerned because you haven’t started to build business credit yet, don’t worry. Many lenders rely on personal credit instead.
Business loans come in a variety of forms to suit different situations. Here’s a look at the different types of business loans:
The right business loan option for you will depend on your business needs. For example, if you use a merchant service provider, like a credit card and payment processing solution, you may want to look into merchant cash advances. However, if you need a line of working capital that you can access as needed over time, a line of credit would probably be best. Knowing all your options is an important first step. Then, narrow them down and compare the products that will work for you to find the best deal.
Both business loans and personal loans can come in handy in different situations. If you’re still not sure which one is best, here are two main questions to ask yourself:
This is an easy way to narrow down your options. Can you qualify for both? A personal loan will be solely reliant on your personal credit history and income. The business loan will require a bit more. If you are a startup or your business hasn’t yet reached the two-year mark, a personal loan may be the easier route. If your personal credit isn’t great but your business case is strong, you may be able to get a business loan but not a personal loan. Either way, a good first step is figuring out which you can get.
If both a personal loan and business loan are options, it’s time to dig into the details of the offerings. Consider factors such as the loan types, amounts, fees, interest rates, terms, overall cost, time to funding, and customer service ratings. You want to find the least expensive loan solution that best suits your situation. For example, with a business loan, you may be able to borrow more money at an equally competitive rate. In that case, it’d be the better route.
If you’re interested in learning more about business loans and what you can get, the process has never been easier. Many online lenders have cropped up, streamlining the loan application and disbursement process. All can be done online without needing to visit your local bank or credit union.
At Biz2Credit, we can tell you if you’re pre-qualified in seconds. We’ll collect some basic information about your business and credit score, then will match you with business loans that will be a good fit. You can compare your options to see which is best and if it beats any personal loan offers you’ve received.
Ready to get started?