Business Loan vs. Personal Loan: Which Is Right for You?

There are pros and cons to selecting a personal loan over a business loan when you’re in need of business funding.
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If you are deciding between using a business loan or a personal loan when seeking financing, keep in mind that even though personal loans can be used for business purposes, they often lack some of the benefits of a business loan.

Comparing loan terms, credit implications and personal liability issues can help you determine whether a business loan or a personal loan is the best option for you and your business.

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How do business loans work?

Business loans — including SBA loans, term loans, lines of credit and equipment financing — are financing options typically offered by banks, credit unions, online lenders and some community lenders to entrepreneurs and business owners.

Funds from business loans are required to be used for business purposes. Depending on the lender and the loan program, funds from a business loan can be used in a variety of ways:

  • Starting a new business.

  • Expanding or acquiring an existing business.

  • Purchasing real estate, or constructing or renovating buildings.

  • Refinancing other business debt.

  • Purchasing equipment, machinery, furniture and other business assets.

  • Setting aside as revolving funds or working capital.

Pros and cons of business loans

Pros

Large loan amounts.

Long repayment periods.

Builds business credit history.

Limited personal liability, in some cases.

Cons

Strict qualification requirements, generally.

Slow funding process.

How does using a personal loan for business work?

Personal loans and lines of credit are offered by banks, credit unions and online lenders to individuals including business owners.

Lenders generally put few limitations on the uses of personal loans. Unless your lender specifically excludes it, the funds from a personal loan can generally be used for the same things as a business loan, including starting a business.

Pros and cons of using a personal loan for business

Pros

Flexible qualification requirements.

Fast funding process.

Funds can be used for business purposes.

Cons

Doesn’t build business credit history.

Personal liability for debt.

Increases personal debt-to-income ratio.

How to decide between choosing a business loan vs. a personal loan

There can be consequences to choosing a personal loan over a business loan. As a general rule, to protect your personal assets and credit, it’s best to keep your personal finances separate from your business finances. Before you blur the line between the two, give some consideration to the following.

Credit score impact

Personal loans, even when used for business purposes, aren’t associated with your business credit history. If you want to build your business credit and strengthen your chances of getting additional funding in the future then choosing a business loan instead of a personal loan is one of the best ways to do it.

Also, choosing a personal loan over a business loan can affect your personal credit score. Details of the loan will appear in your personal credit history and not in your business credit history. And late or missed payments will typically impact your personal credit score in a negative way.

Personal liability and debt

Personal liability isn’t always a consideration when choosing between a business loan and a personal loan. While a personal loan is your responsibility, there are also times when you may be personally liable for a business loan. Personal liability often depends on the business structure you choose. Sole proprietors and general partners are typically held personally responsible for business debts. In contrast, structuring your business as a limited liability company (LLC) or corporation can often protect your personal assets.

In addition, if you offer a personal guarantee, which is often required to get a small-business loan, you are personally liable for the debt.

Finally, even if the funds from a personal loan are for business purposes, the debt appears on your personal credit report. This increase in personal debt can work against you when you apply for other personal financing. For example, the amount of debt listed on your personal credit report can affect your ability to get a personal mortgage.

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Qualification requirements

Business loans can be difficult to obtain, especially if you're a startup business. Lenders often set eligibility requirements for time in business, annual revenue and credit score. There are some lenders who offer business loans for startups and others, often online lenders, that have more flexible requirements related to revenue and credit scores. However, these loans will often have higher interest rates and shorter terms.

Qualifying for a personal loan may be easier in some cases. Lenders for personal loans look at your personal income and debt-to-income ratios in addition to credit scores. This can be helpful when your business has only been operating for a short time or you aren’t generating significant revenue.

Loan terms

Comparing the terms of a personal loan with those of a business loan can help you determine which is the right type of loan for your business. Here are some areas to focus your attention.

Loan amount

Consider the loan amounts you’ve been offered. A business loan will generally offer a larger loan amount than a personal loan. For example, a personal loan from SoFi, an online personal finance company, tops out at $100,000. In contrast, JP Morgan Chase offers business term loans up to $500,000, and SBA 7(a) loans, the Small Business Administration’s primary business loan program, have maximum loan amounts of up to $5 million.

However, loan amount may only be important when the personal loan amount you’ve been offered is well below what you actually need for your business.

Interest rate

In some situations, the interest rate on a personal loan can be higher than the rate on a business loan. However, the interest rate you receive will depend on a number of factors including your credit score. You can use a business loan calculator to estimate monthly payments, total loan payments and total interest paid to see if the difference in interest rates is significant between the loans you’ve been offered.

Repayment period

Business loans can offer a longer repayment period than personal loans, depending on the lender. For example, the Sofi personal loan we mentioned earlier and the JP Morgan Chase business loan have the same maximum term of seven years. However, SBA 7(a) loans can have repayment periods of up to 25 years.

Be aware that a longer loan repayment period can also mean that you will pay more interest over the life of the loan.

Repayment amount

The loan amount, interest rate and loan term or repayment period determine your repayment amount. Comparing the repayment amounts between the personal loan and the business loan you’ve been offered can help you see which is the best fit for your budget.

Funding speed

The application process for personal loans is generally faster than that of business loans — although there may not be much difference when using an online lender. However, be aware that faster processing speeds may also mean higher rates and less favorable loan terms.

The length of time it takes to fund a business loan often depends on the loan type and the lender. For example, the processing time for SBA loans is generally anywhere from 30 to 90 days. A bank business loan may be relatively faster, taking weeks instead of months. And online lenders typically have the fastest processing time, as short as a few days in some cases.

When comparing loan offers, be sure to ask each lender how quickly they fund loans. If there is a difference of weeks instead of days, this could be an important factor in your decision.

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Frequently asked questions

It depends. A business loan may offer more favorable loan terms including a larger loan amount, build your business credit history and be helpful in keeping your personal finances separate from your business finances. On the other hand, a personal loan can be faster and easier to get than a business loan, especially if you’re a startup business.

Business loans can be difficult to obtain, especially if you haven’t been in business for very long, don’t have steady revenue or a good credit score. Business loans can also take a longer time to process and fund, although online lenders can offer fast funding.

Yes, a personal loan can typically be used for business needs. However, even though the loan is used for your business, loan details and payment information will be reflected on your personal credit report. As a result, a personal loan won’t build your business credit history and missed payments could have a negative impact on your personal credit score.

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