Business Loan Vs Personal Loan; Which One Is Right For You

Is your business booming, and you need to purchase extra inventory or hire more employees? You will always need money to put into your business. Otherwise, you will lose opportunities to grow. From business credit cards to loans from investors, there are several ways to get funding and grow your business. The two most popular loans that are being used by businesses are personal loans and small business loans. These loans are usually used by the business owners who do not have equity to put in the loan or who do not want to turn to outside investors. If you want to get information about business loans vs personal loans, this article is for you. Both options are worth considering but which one is best for you depends on the requirements of your business. In order to choose the right one, you must understand that business loans and personal loans are designed for separate purposes, and each of them has different eligibility criteria. Therefore, to help you make an informed decision, we will describe the major differences between these two loan types.

What Is A Personal Loan?

A personal loan provides you financial aid, whether it is a planned event like a wedding or an unexpected event such as paying medical bills, repairing a car or home renovation. You can take a personal loan from commercial banks or traditional lending institutions. It can save you from a financial crisis, and you can use it for almost any purpose. This type of loan is also known as an unsecured loan because it does not require any assets as collateral. When you apply for a personal loan, the lender or bank, your credit history, and financial information will be reviewed to find your creditworthiness and affordability. The lender also sets the interest rate on the basis of this information. Typically you can take out a loan for 12 to 60 months. It can be a perfect solution as you do not need any security but keep in mind that if your business fails to repay, you are personally liable for the outstanding balance.

Pros And Cons Of Personal Loans

You can use a personal loan to fulfil your business needs but to make a better decision you must know its advantages and disadvantages:

Pros

You can quickly borrow the amount required.
Loan terms usually last up to 7 years which mean you can spread repayment over a long term.
Numerous lenders are present in the UK, so the competition benefits the consumers in finding the best rates.
Personal loans have fixed monthly repayments which means no nasty repayments.
These loans are mostly unsecured, meaning you do not need any collateral.

Cons

You can not borrow a huge amount through such loans. Capital limits are lower, usually £30,000.
These loans are not tax deductible.
Interest rates are usually higher than business loans.
Some lenders do not allow you to use personal loans for business use.
Instead of your business you are personally liable to pay the loan.

What Is A Business Loan?

In order to thoroughly compare business loans vs personal loans, we have to understand both. If you want to make some money, you will need some money to invest in the beginning. So, If you want to start a new business, a business loan can be a good funding source. On the other hand, if you have an established business and want to expand it, hire more employees or inject some capital, you can consider a business loan to fulfil your requirements. However, business needs are diverse so that you can find a variety of commercial loans in the market, such as equipment financing, term loans and invoice financing. These loans can be short term and long term, and you have to provide necessary information about your business, such as financial statements, annual turnover and financial projections. In addition, the loan terms can vary from a week, such as invoice funding, to 25 years of commercial loans used for real estate.

Advantages And Disadvantages Of Business Loans

Here is a quick glance at business loan advantages and disadvantages so that you can get more understanding:

Advantages

You can qualify for larger amounts as compared to personal loans.
Business loans are tax deductible.
If your company has an appropriate structure in place the debt is the responsibility of the business not the individual.
Commercial loan products usually include tools and support to help you achieve your goals.

Disadvantages

The application process is longer than the personal loans.
May not be available for start up or relatively new businesses.
Businesses who are already in debt are usually not accepted.
In order to secure a loan you usually need a collateral and long trading history.

Differences Between Business and Personal Loans

The most significant difference between business and personal loans is how you can use them. For example, a business loan is used specifically to meet business-related expenses such as purchasing new equipment, paying wages, repairing machinery, and overcoming any other operational cost. On the other hand, personal loans offer more flexibility in their use. They can not only be used to fulfil business needs, but you can also use these funds to fulfil private expenses that are indirectly related to your business. For example, you can use it to buy a home near your workplace; it is not a direct business expense, but it can help you improve your work efficiency. Now let’s have a detailed look at the differences between personal and commercial loans:

Loan Purpose

Business loans are used to fulfil business needs such as expanding a business, starting a new one or purchasing new equipment. In comparison, a personal loan can be used for business as well as personal expenses.

Loan Terms

With the increasing demand for loans, the types of loans have also increased. You can get short term and long term business and personal loans. But usually, personal loans have a shorter term compared to business loans and are usually for a few months to a few years. In contrast, commercial term loans can range from two years to twenty years, depending on your business type.

Loan Amount

Business loans offer huge sums compared to personal debts when it comes to the loan amount. You can take out an amount between £5,000 to £5 million with a business loan. On the other hand, the amount you can borrow through a personal loan usually is nowhere near as high as you can borrow through a business loan. The amount you can take out from any loan can vary from lender to lender and according to your personal circumstances.

Tax Deduction

Tax deduction on your business loans depends on your state’s law. For example, you have to pay tax on the secured loan amount in some states. In contrast, personal loans are very rarely tax-deductible.

Quick Look At Personal Business Loans Vs Personal Loans

The following table describes the key differences between personal and business loans.

Differences	Business Loan	Personal Loan
Use of Loan	These loans are used only to fund direct business expenses such as paying wages, purchasing equipment or hiring new employees.	It can be used to pay off business expenses such as funding a startup business as well as to fulfil personal financial needs.
Loan Term	You can take out business loans for a longer period upto 20 years.	Personal loans are usually repaid over a short term.
Loan Amount	Business loans can offer a huge loan amount usually upto £5 million.	Loan amount offered by a personal debt provider is usually limited and you can not borrow a large amount.
Collateral	You have to use an asset as a collateral to take out a business debt.	Most personal loans do not require any collateral.
Tax Deduction	Interest on bridging loans is considered as income and i s tax deductible depending on your state’s law.	Personal loans are not considered as incomes so they are not tax deductible.

Things To Consideration When Choosing A Loan

Here are some important considerations to keep in mind when choosing between a business and a personal loan.

When you apply for a business loan, the lenders will check your business credit history, so you must make sure to have a good credit history if you want quick approval and access to funds. You can find several free and paid tools to check the credit score that you can use to check your business credit score and take measures to improve it before applying for a loan. Similarly, when you apply for a personal loan, the lenders check your personal credit score.

In addition, you must determine the amount you need to borrow before applying for a loan. For example, a business loan can offer a larger sum as compared to a personal loan, so if you need a huge amount, a commercial debt can be a better solution for you. However, if you need a small amount to fund a side project or to cover a short term financial need, it is worth considering personal loans.

How to Apply For A Business Loan

Taking out a business loan is relatively a complex process. This is because the lenders review your personal credit and review additional information like your business financial statement, credit history, information related to collateral, and how you will repay the loan amount. When it comes to taking out a business loan, you have several options, such as banks, online lenders and credit unions. When finding a business loan, keep in mind the following things:

Research Loan Types

Because there are many types of business loans, you must take time to decide which one goes best according to your business needs.

Find The Right Lender

Each lender has different requirements, such as minimum income and loan terms, so you should understand these requirements before applying for a loan. It will save your time as you do not need to apply for a loan you are not eligible for.

Compare Rates

The annual percentage rates and fees vary from lender to lender, so it is always better to make a price comparison to find the best deal.

Prepare Documents

A loan application needs a lot of documentation, so once you choose a lender and come to know what they require, it’s time to gather all the required documents in one place.

Apply For A Loan

A business loan application is long, and lenders can take weeks to assess your application. Always keep in mind that if you have prequalified for a loan, it does not mean that you are guaranteed formal approval.

How to Apply For A Personal Loan

Applying for a personal loan takes only a few business days or the time can be less depending on the lender. When you apply for a loan, the lender will review your personal financial information, including your income and credit score. So if you need funds for any of your business projects but have not established a credit score yet, you can use your credit score to take out a personal loan and use it to pay off your business expenses.

If you want to find a personal loan for your business, keep in mind the following considerations:

Review Minimum Criteria

As you do research, you come to know that different lenders have different minimum criteria that you have to meet if you want to qualify for a loan. These criteria include a specific credit score or minimum income. Some lenders also do not allow you to use a personal loan for a business purpose so check it before applying for a loan.

Apply for pre qualifications

Many lenders make a comparison of loan terms easy through a prequalification process. It includes a soft credit check that would not impact your credit score. This process reveals the loan terms that you can get after the formal application process.

Compare Rates

Because personal loans offer a lower amount compared to business loans, you must make sure that you will get enough money to fulfil your business needs. You must also review the Annual Percentage Rate (APR), monthly payment and the lender’s fee structure.

Apply For Loan

Once you select a lender, make a formal application that will lead to a hard credit check. The lender also requires you to submit some necessary s=documents, such as proof of income.

Which Loan Is Best For Your Business

When choosing between a personal and business loan and the lender to go with, you need to consider your business and personal credit score, financial history, and the objective of your business. If you keep all these things in mind, it will help you in having a clear picture of which type of loan will work best according to your situation. Here are some common business situations and the best loans that can protect you from the financial crisis in these situations:

If you have an established business and want to build a good credit score, you can take out a short or medium-term loan and pay it off as soon as possible to boost your credit score quickly.
If your business has a poor credit score, but your personal credit score is good, you should apply for a personal loan; you can use this loan to improve your business financial conditions and ultimately get approval for large business debts.
Suppose you do not have a valuable asset to use as collateral, or you do not want to use your asset as collateral. In that case, a personal loan can be a viable option because traditional lenders usually do not require collateral.

If you choose a business loan, you would have to show collateral, get a lower interest rate and more time to repay the loan. Pon the other hand, if you take out a personal loan, you would not have to use an asset as collateral, get a higher interest rate and have a shorter time to repay the loan.

Conclusion

As you can see, choosing between a personal and business loan is not clear cut. However, the choice becomes easier when you analyse your business circumstances. Each loan type has its benefits and drawbacks, so you should keep them in mind when choosing a loan. You must keep in mind certain things to select the right option for you. Keep in mind your business, trading history and how much growth you want to drive. This way, you can find the loan amount required if you need a small amount, a personal loan can be enough.

Similarly, you should consider timeframes. Sometimes the long application process can be counterproductive for your business. If you need quick funding, it is worth considering a personal debt. Furthermore, it also matters whether you want to take out a secured or unsecured loan.

Overall, when choosing between a business and personal loan, it all depends on your business circumstances and which loan will be best for you.