Business Loan Vs. Personal Loan: A Comparison
7-Minute ReadJuly 25, 2022
If you’re a business owner who clicked on this article, you most likely need to get your hands on some extra cash to finance the growth of your company.
Whether you’re launching a new venture or taking your existing business to the next level, there are several loan options that can provide the money you need. For business owners who don’t want to appeal to investors, the next step is to consider taking out a business loan or a personal loan.
Let’s take a look at how these two types of loans compare, and how you can determine which option is right for you and your business.
What’s The Difference Between A Business Loan And A Personal Loan?
Before we explore how business loans and personal loans can be used to finance business expenses, let’s review how both loan options work.
What Is A Business Loan?
As its name suggests, a business loan provides funding for your business needs. Since every business operates differently, many small-business loan lenders support a wide range of available loan options. The Small Business Administration (SBA), for example, offers invoice financing, equipment financing and term loans.
This type of loan can be secured or unsecured, depending on your business’s credit history, and its repayment period can stretch up to 25 years. Business loans that are repaid on time can help build credit for the company, making it easier to borrow more money in the future. However, some business loans are strictly for business-related purposes, which can limit its application.
What Is A Personal Loan?
A personal loan is a type of credit that allows you to borrow and repay a set amount of money from a bank, credit union or online lender. Personal loans are unsecured and come with a predetermined loan amount and repayment period, as well as a fixed interest rate.
One of the popular features of a personal loan is its ability to be used for (almost) any purpose. As long as your personal loan lender doesn’t have restrictions against using a personal loan for business, it can finance expenses like new inventory as easily as it can be used to pay employees.
Once you’re approved for a personal loan, you can expect to receive the lump sum within a few business days. After that, you’ll begin making payments on it for the life of the loan, which is why it’s important to ensure that you commit to the repayment schedule.
The Pros And Cons Of Using A Business Loan
Now that we’ve covered the basics of business loans and personal loans, let’s dig into the pros and cons of both choices. Here are the factors to consider when deciding whether to use a business loan to fund your professional venture.
The Pros Of Using A Business Loan
- Separate business credit and finances: As a business owner, you have to be able to separate your business and personal finances. By taking out a small-business loan, you’ll help boost your business’ credit with its loan lender, proving that the company is trustworthy when it comes to repaying its debts.
- Higher loan amounts: If you need a larger loan to cover your business expenses, you’ll most likely need to apply for a business loan. Personal loans can cover between $2,000 – $100,000, whereas most business loans can provide hundreds of thousands of dollars to borrowers.
- Limited personal liability: Since the funds provided by a business loan are controlled by the company, the owner has limited personal liability in the event of loan default or inability to repay. Keep in mind that this policy depends on the specifics of the individual loan.
The Cons Of Using A Business Loan
- It can be difficult for a new business to attain: Since business loans are approved based on the company’s credit and financial status, it can be difficult for new ventures to secure this type of funding. Additionally, it usually takes longer to be approved for business loans, due to the large amounts of paperwork involved with the process.
- It may require a personal guarantee: As mentioned above, not every business loan features limited personal liability. Business loans for brand-new or struggling businesses may require a personal guarantee, meaning you could be held responsible for any of the business’ financial shortfalls.
- Tight loan restrictions: Unlike personal loans, business loans typically mandate that the loan amount be spent on only business-related expenses. In some cases, the loan lender may also require the business to stay above a certain debt-to-income ratio or other financial stipulation.
The Pros And Cons Of Using A Personal Loan For Business
A personal loan for business is a popular option among companies that need fast funding. Here are the factors you should consider when deciding whether to take out a personal loan to fund a business-related expense.
The Pros Of Using A Personal Loan For Business
- Easier to qualify: In comparison with business loans, it’s usually easier to get approved for a personal loan. Personal loan lenders base their approval on your personal credit and financial status, not the business credit. Plus, since there’s less paperwork to examine, personal loans are usually approved faster.
- No collateral required: Since personal loans are unsecured, you’ll never be required to put down collateral or a down payment on the loan. This feature is especially helpful to new or struggling businesses that don’t have access to collateral.
- Few restrictions: Business owners can use personal loans to fund any type of expense with few restrictions. Almost everything from office supplies to digital marketing efforts can be funded by a personal loan.
The Cons Of Using A Personal Loan For Business
- You’re risking personal credit: If you take out a personal loan for your business and fail to repay on schedule, you’ll be held personally liable for the debt. This can cause your credit score to drop quickly, and make it more difficult to secure future funding.
- Higher interest rates: When comparing personal loan rates and business loan rates, the interest rates for business loans are typically This is important to keep in mind when deciding on a loan type, because higher interest payments can eat into a company’s profit margin.
- Shorter repayment period: Compared to business loans, personal loans typically have a shorter repayment period. Most personal loan terms range from 1 – 7 years, whereas business loans can last 5 – 25 years.
How To Choose Between A Business Loan And A Personal Loan
If you’re torn between these two payment options, don’t worry – we’ve got you covered. Keep in mind that you should prioritize your personal budget and business needs in your decision-making process.
When To Choose A Business Loan
- You need to borrow a lot of money: If you’re planning to borrow upward of $100,000, you’ll most likely need to apply for a business loan. The lending limits of business loans are much higher than personal loans, and they can accommodate business owners who need significant funding.
- You want to build business credit: Do you need help boosting your business’ credit and credibility with lenders? If so, taking out a business loan and repaying the debt on time is a great strategy to achieve this financial goal.
- You require a lower interest rate: Although the loan’s interest rate depends on the qualification requirements, you’ll most likely receive a lower rate on a business loan than a personal loan.
When To Choose A Personal Loan
- You need money quickly: In some business-related situations, there isn’t enough time to process tons of paperwork and wait weeks for a loan approval. If you need quick access to funding for your business, a personal loan is the way to go. Rocket LoansSM even offers same-day funding to qualified borrowers who need money in a pinch.*
- You don’t have strong business credit: In order to receive favorable loan terms on a business loan, the company needs to present a strong credit and financial history. That’s why it may be more beneficial for new companies to apply for a personal loan with terms based on the applicant’s personal credit score and financial status.
- You want to repay the loan quickly: If your plan is to repay the new loan as quickly as possible, you’ll most likely prefer a personal loan. Since business loans are structured for larger sums of funding, the repayment period is much longer.
How Do I Get A Personal Or Business Loan?
Whether you’re planning to apply for a personal or business loan, there are several preemptive steps to take before submitting your application. Let’s look at how you get a personal loan or a business loan.
Applying For A Personal Loan
In comparison with the business loan application process, the personal loan application process is a breeze. To prequalify for a personal loan, the lender will request basic personal information, including your address, income information, Social Security number and date of birth. They’ll use this information to conduct a soft credit pull, which will not affect your credit score.
Once you’ve chosen the lender with the most favorable personal loan terms, you’ll submit an application with the following information:
- Bank account information
- Driver’s license or other identification card
- Pay stubs
- Bank statements
- Tax forms
Applying For A Business Loan
In order to qualify for a business loan, you’ll need to prove to the lender that your company will be able to fulfill its monthly payments. Be prepared to submit documentation of your business credit history, time in business, cash flow, proof of profitability and, in most cases, your personal credit history. For secured loans, you’ll also need to present collateral for the loan.
Here’s a list of some of the required documents for a business loan application:
- Business bank account statements
- Business and personal credit scores
- Tax returns for the business
- State licenses and registrations
- Any legal contracts related to the business
- Additional financial documents, such as credit card sales or accounts receivable
Final Thoughts: Choose The Loan Option That Fits Your Business Needs
Whether you’re searching for financing for a budding business or need cash for new equipment, both business and personal loans can provide funding to make it happen. Business loans are a great option for companies that need significant backing, and that want to make smaller monthly payments over a longer period of time. On the other hand, personal loans for business are a preferred financial option for companies that need money quickly and don’t want to put down collateral, just remember that you’ll be held personally liable for the debt.
If you’re ready to explore your personal loan for business options, start by applying for a Small Business Personal Loan through Rocket Loans.
* Same-day funding is available for clients completing the loan process and signing the Promissory Note by 1:00 p.m. ET on a business day. Also note, the ACH credit will be submitted to your bank the same business day. This may result in same day funding, but results may vary, and your bank may have rules that limit our ability to credit your account. We are not responsible for delays that may occur due to an incorrect routing number, an incorrect account number or errors of your financial institution.
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