Personal loans are typically not backed by collateral, and they can be obtained by anyone for a wide range of purposes. On the other hand, business loans are designed for specific business-related goals or requirements, and it may be necessary to provide collateral as security for the loan.
A business loan is made strictly for your business. It’s usually made to your company—not to you personally—and has different eligibility requirements, interest rates, and terms.
Pros of Business Loans
- Access to capital: Business loans provide a valuable source of capital that can be used to start a new business, expand an existing one, purchase equipment or inventory, hire employees, invest in marketing, or cover day-to-day operating expenses. It enables businesses to access the funds needed to grow and thrive.
- Business growth opportunities: With the additional capital from a business loan, businesses can seize growth opportunities that arise, such as launching new products or services, entering new markets, or acquiring other businesses. The availability of funds can help businesses stay competitive and take advantage of favorable market conditions.
- Flexibility in use: Business loans offer flexibility in how the funds can be utilized. Whether it’s for working capital needs, purchasing assets, financing projects, or managing cash flow, businesses have the freedom to allocate the loan amount according to their specific requirements.
- Building business credit: Timely repayment of business loans can contribute to building a positive credit history for your business. Establishing a strong credit profile can help in securing future financing at more favorable terms, such as lower interest rates or higher borrowing limits.
- Tax benefits: In many cases, the interest paid on business loans is tax-deductible, which can provide some relief and reduce the overall cost of borrowing. It’s important to consult with a tax professional to understand the specific tax implications and benefits applicable to your business.
- Potential for lower interest rates: Depending on factors such as your business’s financial health, credit history, and collateral offered, business loans may come with lower interest rates compared to personal loans or other forms of financing. Lower interest rates can save businesses money over the loan term.
- Separation of personal and business finances: By obtaining a business loan, entrepreneurs can separate their personal finances from their business finances. This separation simplifies bookkeeping and helps maintain a clear distinction between personal and business expenses.
Cons of Business Loans
- Debt and financial obligations: Taking on a business loan means adding debt to your business’s financial obligations. Repaying the loan, along with interest and fees, can place strain on your cash flow, especially if your business encounters unexpected challenges or experiences fluctuations in revenue.
- Collateral requirements: Some business loans may require collateral, such as property or equipment, to secure the loan. If you’re unable to repay the loan, you risk losing the collateral. This can be a significant risk, especially for new businesses that may not have substantial assets to offer as security.
- Impact on creditworthiness: If your business faces difficulties in repaying the loan or misses payments, it can negatively impact your business’s creditworthiness. Poor credit history can make it challenging to secure future financing or obtain favorable terms from lenders.
- Potential for personal liability: Depending on the type of business loan and its terms, you may be required to provide a personal guarantee. This means you become personally liable for the loan if your business fails to repay it. Personal liability can put your personal assets at risk if the business is unable to fulfill its repayment obligations.
- Restrictions on business decisions: Some business loans come with covenants or restrictions that limit your business’s flexibility in making certain decisions. For example, there may be restrictions on expanding or restructuring your business, acquiring assets, or taking on additional debt without the lender’s approval.
- Interest rates and fees: Business loans can come with higher interest rates and fees compared to other forms of financing. The overall cost of borrowing, including interest payments and origination fees, can increase the financial burden on your business.
- Qualification criteria: Qualifying for a business loan may require meeting specific criteria set by lenders, such as demonstrating a certain level of revenue, profitability, or creditworthiness. This can make it challenging for new businesses or those with less-established financial histories to access the necessary funding.
You can use a personal loan for almost anything you want. Personal loans can be used for business expenses, but they are not limited to only company needs. You can also use them for other things affected by your business.
Pros of Personal Loans
- Flexibility: Personal loans provide flexibility in terms of usage. You can utilize the loan amount for a wide range of purposes, such as debt consolidation, home improvements, medical expenses, education, or even a vacation. The choice is yours.
- No collateral required: Personal loans are typically unsecured, meaning you don’t need to provide collateral, such as your house or car, as security for the loan. This reduces the risk of losing your assets if you’re unable to repay the loan.
- Easy application process: Compared to other types of loans, personal loans often have a straightforward application process. Many financial institutions and online lenders offer convenient online applications, making it quicker and more convenient to apply and receive funds.
- Fast access to funds: If your personal loan application is approved, you can often receive the funds relatively quickly. In some cases, it can be as fast as within 24 hours, allowing you to address your financial needs promptly.
- Fixed repayment terms: Personal loans usually come with fixed repayment terms. This means you know exactly how much you need to pay each month and for how long. Having a fixed repayment plan helps with budgeting and financial planning.
- Potential for lower interest rates: Depending on your credit history and financial situation, personal loans may offer lower interest rates compared to credit cards or other forms of high-interest debt. This can save you money on interest payments over time.
Cons of Personal Loans
- Interest rates: Personal loans may come with higher interest rates compared to secured loans, such as mortgages or auto loans. The interest rate you qualify for depends on factors like your credit score, income, and repayment history. Higher interest rates can increase the overall cost of borrowing.
- Impact on credit score: Taking on additional debt through a personal loan can impact your credit score. If you miss payments or default on the loan, it can have a negative effect on your creditworthiness. It’s essential to make timely payments to maintain a good credit history.
- Origination fees and charges: Some lenders may charge origination fees or other upfront costs when you take out a personal loan. These fees can add to the overall expense of the loan, so it’s crucial to understand and factor them into your calculations.
- Potential for overborrowing: The availability of personal loan funds can tempt individuals to borrow more than necessary. It’s important to assess your needs realistically and borrow only what you can afford to repay comfortably. Overborrowing can lead to financial strain and difficulties in meeting repayment obligations.
- Prepayment penalties: Some lenders impose prepayment penalties if you decide to pay off your personal loan early. These penalties can offset the potential savings from early repayment and limit your flexibility in managing your finances.
- Risk of debt accumulation: If you already have existing debts, taking on additional personal loan debt can increase your overall debt burden. It’s crucial to evaluate your financial situation carefully and consider whether taking on more debt is the right decision for your long-term financial well-being.
Key Differences Between Personal Loans and Business Loans
You can use a business loan to pay for things related to your business, like employee salaries, equipment, starting a new company, and other similar expenses.
A personal loan can be used for both personal and business needs, which can be helpful if you’re just beginning your business journey.
Where to Get One
You can get both personal loans and business loans from many banks, credit unions, and online lenders. Some banks might have business-oriented loans, while others might have more general lines of credit.
The amount of money you can expect to receive from a personal loan varies by lender, but you can generally expect them to go as low as $1,000 and as high as $40,000 or $50,000.
Business loan funding also varies by lender. Some go as high as $500,000, while others offer even greater amounts, such as $2 million or even $5 million.5
Personal loan eligibility is based on your credit score and history. The higher your credit score, the more likely you are to qualify for the lowest interest rate available. The lower the score, the less likely you are to qualify.
Eligibility for business loans is tied to your company’s business credit score and history. If your business is still new, you might not have these. Some banks use your personal credit score and history to qualify for a business loan, but you might need to sign on as a personal guarantor that says you’re personally responsible for repaying the loan if your business can’t.
Some personal loans are secured, in that you can put up savings or a certificate of deposit (CD) account as collateral, but your loan limit is usually tied to how much is in those accounts. Most business loans are unsecured, but some lenders offer secured business loans. Collateral for secured business loans is typically tied to business assets, such as real estate, equipment, or inventory.
Personal loans tend to have higher interest rates than business loans. Right now, personal loan interest rates average around 11.5%, while average business loan interest rates are just over half that number.36
Length of Loan
You can take out a personal loan for three, five, or sometimes seven years. A few lenders will have longer terms, going upward of 10 or even 12 years, depending on the purpose of your loan.
While some business loans might be short-term ones that you’ll need to pay back within one to five years, many business loans have terms as long as mortgages (i.e., upward of 25 or even 30 years). Because there are many different types of business loans, repayment terms can vary as well.
There are no tax benefits for personal loans. Depending on where you live, the interest paid on business loans might be tax deductible.
Should I Choose a Personal Loan or a Business Loan?
A personal loan makes sense if:
You don’t have a business that can yet borrow money on its own.
You don’t have a business credit score or history to prove your business is eligible for a loan.
You need funding for a mix of business and personal reasons.
You don’t want to put up any collateral to secure a loan.
You need money right away (i.e., within the next few days).
A business loan makes sense if:
You want your business to build and maintain credit.
You need to borrow a lot of money.
You want the lowest interest rate available.
You could benefit from longer repayment terms and more loan options.
You can afford to wait to get the money, as it can take a while for funds to be deposited into your account.
Can I use a personal loan for business, and vice versa?
While you can use a personal loan for some business-related expenses, you can’t always use a business loan for personal needs. There are some workarounds, like purchasing a certain item or need that directly impacts your business. An example of this is buying a phone so you can communicate with customers, but one you also use for personal needs.
Can I have a personal loan and a business loan with the same lender?
Yes, you can have a personal loan and a business loan with the same lender, as long as it offers both of those services. You might have better odds of being approved by an institution that you already do business with since they can evaluate your current status with them to see if you’re eligible.
What is the difference between a business loan and a line of credit?
A line of credit operates like a credit card. You can pull money out on an as-needed basis and pay it back regularly. A business loan is a lump-sum amount deposited into your business’s bank account, where you’ll make minimum payments on your loan until it’s paid in full.
The Bottom Line
While both personal loans and business loans are available for business-related expenses, the one you should choose depends on your needs—not only professionally but also personally. If possible, find the ones you’re eligible for with the best repayment terms before completing a full application.