Are you looking to take out a loan to renovate your home?
Or do you need it for a business expansion?
Choosing between a business loan and a personal loan will depend mainly on your situation and needs.
Understanding the difference between business loans vs. personal loans can save you money, time, and the hassle of getting denied.
If you’re trying to decide whether to apply for a business or personal loan, this will be the most crucial post you’ll read today.
Generally, personal loans are unsecured loans, and anyone can take one out and use it for almost anything.
On the other hand, business loans are specifically made for business ventures and usually require collateral.
Stick with me, and I’ll show you the difference between both loans and reveal a few alternative financing options for business owners like you below.
Without further ado, let’s get right into it!
What’s a Business Loan?
Business loans are great financial products specifically made to help finance the operation or growth of businesses.
Business owners use these loans and other types of financing for various purposes.
Entrepreneurs and business owners can use these funds for investments, operational expenses, purchasing equipment, and working capital needs.
Business loans, however, typically require some sort of collateral or a personal guarantee as an added layer of security.
Also, remember that small business loans usually have longer repayment terms than personal loans.
How Does a Business Loan Work?
Business loans, such as term loans, business lines of credit, SBA loans, and equipment financing, are just a few of the financing options usually offered by traditional lenders like banks.
However, you can also find them in credit unions, community lenders, and online lenders.
The funds from the business loan must be used for business purposes only. You’re not allowed to use the money for your own personal purchases.
Depending on the lender and the loan terms, funds from a business loan can be used in:
- Funding a startup business
- Expansion of business
- Acquiring a business
- Buying property or renovating buildings
- Refinancing debts
- Purchasing business equipment and other business assets
- For revolving funds or working capital
Advantages of a Business Loan
- Flexibility of Loan Purpose: Business loans can be used for operational expenses, working capital needs, equipment financing, and more.
- High borrowing limits: Lenders can give you larger amounts of funds than personal loans. Business loans can range from $1,000 to $5 million and more.
- Repayment terms: Business loans typically have longer repayment terms, making them easier to manage. Generally, lenders require borrowers to repay the business loan over 3 to 10 years, and to some extent, it can even extend up to 25 years.
- Lower interest rates: Business loans usually come with lower interest rates, especially if you have a high credit score and have offered valuable collateral.
Disadvantages of a Business Loan
- Strict Qualification Requirements: Traditional lenders and banks typically have stricter approval requirements. For instance, they often require reviewing your personal and business credit scores to assess your creditworthiness.
- Collateral: Secured loans will require valuable collateral to provide lenders with added security. However, it can be difficult for startups to offer collateral since they still lack assets.
- High interest rates: Interest rates in business loans can vary. If you can’t offer any collateral or you currently have a low credit score, expect to pay higher interest rates than usual.
- Personal guarantee: Lenders often require you to sign a personal guarantee if you can’t offer business collateral. A personal guarantee means that you’ll have to pay using your personal assets to repay the loan if the business cannot do so.
- Slow funding speeds: The business loan process is typically longer than other financial products. It may take a few weeks for banks to process your loan application, while online lenders can give you the funds on the same day you apply.
What’s a Personal Loan?
Now, let’s move on to personal loans.
Personal loans are unsecured loans that people use to pay different costs and expenses.
It can be used for home renovation, weddings, vacations, medical expenses, and sometimes business expenses.
You can find personal loans in credit unions, banks, and online.
These loans don’t require a high credit score or even collateral, making it easier to qualify for.
However, lenders may restrict you from using personal loan funds for business purposes. If you plan to do so, confirm with the lender before applying.
How Does a Personal Loan Work?
Depending on the lender or financial institution, you can apply for a personal loan in person, online, or via phone.
Common personal loan requirements are income, proof of identity, and credit.
Fortunately, personal loans are typically easier to qualify for than other financial products.
The application process for this loan is usually faster and less hassle than business loans.
That means you’ll get quicker funding! And if you’re lucky, some lenders even offer almost instant approval.
In a personal loan, funds are given in a lump sum and are repaid monthly plus interest.
Advantages of a Personal Loan
- Flexible uses: Personal loans can be used for almost everything! If you want to borrow for a vacation, a wedding, major expenses, home renovation, and many more.
- Fast funding: As we’ve discussed earlier, personal loans can be approved quickly. They can be approved the same day you apply.
- Lenient qualifications: The requirements and qualifications for a personal loan is less strict than those for a business loan. Lenders for personal loans may be more forgiving of your credit scores and other needed requirements.
- No collateral requirement: Personal loans do not require any collateral to qualify for the loan. That’s why it’s a very popular finance choice among business owners who lack assets.
Disadvantages of a Personal Loan
- Abbreviated repayment terms: Unlike business loans, personal loans come with shorter repayment terms—usually between one and seven years. This results in higher monthly payments and can make them more difficult to manage.
- Limited funds available: Most personal loans have a maximum amount of around $50,000 but may go up to $100,000, depending on the lender. Still, these amounts are lower than for business loans and can make it difficult for some borrowers to access the funds they need.
- Interest rates may be high: High-risk borrowers may be subject to higher interest rates on personal loans. Additionally, some lenders may charge origination and application fees, which can further increase the cost of borrowing.
Can You Use a Personal Loan for Business?
Yes, using a personal loan for business ventures is still possible.
But that will depend on the lender.
Some lenders don’t allow borrowers to use funds from personal loans to cover business expenses.
It is not recommended to use a personal loan to cover business expenses, as the terms and conditions of such loans are usually unsuitable for business purposes.
Personal loans also tend to have shorter repayment terms and higher interest rates than business loans.
Alternatives Financing Options
If you’re unsure whether you’d like to take on a new loan for your business, there are alternative lending options. Here are a few ideas:
- Crowdfunding: Online platforms like Kickstarter or Wefunder help create posts about your product or services. You can choose a goal amount and develop rewards for donors, such as early access to your product or offering special features like limited edition creations.
- Grants: Business grants are funds issued by the government, a company, or a philanthropist. Funds are basically free money, meaning you don’t have to pay them back.
- Online Lenders: Many entrepreneurs opt for online lenders since they are easier to qualify for than traditional banks and popular lending agencies. Their application process is easy and can be completed online in just a few minutes.
Business Loan vs. Personal Loan: Final Thoughts
While both business and personal loans are available for business ventures, choosing between both loans will mainly depend on your needs, not just professionally but also personally.
When applying for a loan, it’s important to consider your personal assets, not just your business ones, since many lenders may require a personal guarantee to qualify.
Compare different loans before jumping the gun and sending out applications. Check first whether you’re eligible and if you agree with the terms.
Try to find loans with the best repayment terms, and of course, consider the interest rates.
Business loans provide various opportunities for business owners who want to expand, build business credit, inventory, and more.
On the other hand, personal loans are very flexible and can be used for almost anything under the sun. It can sometimes be used for business, vacations, medical expenses, and home expansion.