Business Loan vs. Personal Loan: Which Is Right for You?
Use this guide to compare business loans vs. personal loans and choose the right option for your needs.
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Business loans and personal loans can both be used to finance your operations. The right option for you, however, depends on your business history, funding needs and how much personal financial risk you’re willing to take on.
In general, a business loan is better for established companies. A personal loan, on the other hand, can make sense for newer businesses or smaller funding needs.
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| Business loan | Personal loan | |
| Best for | Established business owners looking for larger loan amounts and financing long-term growth. | Startups or smaller funding needs that require fast approval. |
| Loan amounts | Up to $5 million. | Up to $50,000 (some lenders offer up to $100,000). |
| Repayment terms | Up to 25 years. | Up to five years (sometimes as long as seven). |
| Interest rates | Lower, particularly for highly-qualified businesses. | Higher than traditional business loan options. |
| Eligibility criteria | Based on personal credit score, time in business and business finances. | Based on personal credit score, income and existing debt. |
| Funding speed | A few days for online lenders; 30 to 90 days for SBA loans. | Usually within one week. |
| Personal liability | May be personally liable depending on business structure and whether you sign a personal guarantee. | Personally liable in all cases. |
| Tax treatment | Interest is usually tax-deductible. | Interest may be deductible if loan is used strictly for business expenses; requires clear documentation. |
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.
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 do personal loans for business work?
Personal loans and lines of credit are offered by banks, credit unions and online lenders.
Lenders generally put few limitations on the uses of personal loans. Unless your lender specifically excludes it, the funds from a personal loan can be used for the same purposes as a business loan, including starting a business.
Pros and cons of personal loans for business
Pros
Flexible qualification requirements.
Fast funding process.
Funds can be used for business purposes.
Cons
Doesn’t build business credit history.
Lower funding limits than business loans.
Personal liability for debt.
Credit score is impacted if you miss payments.
How to decide between a business loan vs. a personal loan
To determine whether a business or personal loan makes more sense for your needs, consider the following questions:
1. Do you want to build business credit?
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 larger loans or better terms in the future, a business loan can help you do that.
A personal loan will appear only on your personal credit history. Late or missed payments can negatively impact your credit score.
Keep in mind that many business lenders require a personal guarantee. If you sign one, missed payments could affect both your business and personal credit.
2. Are you prepared to take on personal liability?
With a personal loan, you’re always personally responsible for the debt. For a business loan, on the other hand, personal liability depends on your business structure and loan agreement:
- Sole proprietors and general partners are typically personally responsible for business debts.
- Limited liability companies (LLCs) or corporations may offer liability protection — although many lenders still require a personal guarantee.
- If you sign a personal guarantee, you are personally responsible for repaying the debt, even with a formal business structure in place.
3. Can your business qualify on its own?
Business lenders typically consider:
- Business and personal credit score.
- Time in business.
- Annual revenue.
- Financial statements.
Traditional lenders often require at least two years in business and strong credit. Online lenders may have more flexible requirements and offer business loans for startups. These loans, however, typically have higher interest rates and shorter terms.
Personal lenders, on the other hand, tend to focus on:
- Personal credit score.
- Personal income.
- Personal debt-to-income ratio.
If you’re a new business and/or aren’t generating revenue, it may be easier to qualify based on your personal income, instead of business performance.
4. Which option offers better loan terms?
In addition to liability and approval, you should also determine which option offers the better loan terms. Consider:
Loan amount
Business loans generally offer larger loan amounts than personal loans. SBA loans, for example, can provide up to $5 million in funding, whereas most personal loans cap out at $50,000 to $100,000.
Interest rate
Interest rates can vary widely based on qualifications and loan type. In some cases, interest rates on personal loans can be higher than rates on business loans.
Repayment term
Business loans, especially SBA loans, can offer longer repayment terms than personal loans. SBA loans offer terms up to 25 years, whereas most personal loans only offer up to five years.
Longer repayment terms can reduce monthly payments, but you’ll pay more interest over the life of the loan.
Example cost comparison
Say for example, you have a $50,000 loan with a 8% interest rate repaid over five years. You’ll make monthly payments of about $1,014 and pay a total of about $10,830 over the life of the loan.
If you take the same loan with a higher interest rate, say, 12%, your monthly payment increases to about $1,113 and total interest costs to $16,734. Even though your interest rate only increased by a few percentage points, your total costs increased fairly significantly.
Using a business loan calculator can help you estimate costs and compare loan offers to find the best deal for your needs.
5. How quickly do you need funding?
Funding timelines can vary:
- Personal loans: One to seven days.
- Online business lenders: As fast as a few days.
- SBA lenders: Typically 30 to 90 days.
- Business bank lenders: As fast as a few weeks.
If you need funding quickly, speed may play a significant role in your decision. Keep in mind that faster processing speeds may result in higher interest rates and shorter repayment terms.
6. Are there tax implications?
Interest on business loans is usually a tax deductible expense. Interest on a personal loan may be tax deductible if it’s solely used for business purposes. To get this deduction, however, you’ll need to provide supporting documentation that proves no portion of the loan was used for another type of expense.
In general, mixing your personal and business finances can make record-keeping and taxes more complicated. It may be helpful to consult with a tax professional to ensure you’re properly documenting expenses and claiming deductions correctly.
When to choose a business loan
A business loan may be better if:
- You need to borrow more than $100,000.
- You want to build business credit.
- You’re generating revenue and have at least six months in business.
- You want to keep your business and personal finances separate.
- You’re planning long-term growth or a real estate purchase.
Example: Your LLC has been in business for three years, you generate $300,000 per year in revenue and need a $175,000 loan for expansion.
When to choose a personal loan
A personal loan may be better if:
- You’re a new business with no revenue.
- You’re looking to borrow less than $100,000.
- You need funding quickly (within days as opposed to weeks or months).
- You don’t yet qualify for traditional business financing.
Example: A first-time entrepreneur launching an online boutique needs $20,000 for inventory and website development. The business hasn’t generated any revenue yet, but the owner has strong personal credit and full-time employment.
❗Remember, even if used for business expenses, this debt will show up on your personal credit report.
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Frequently asked questions
Which is better, a personal loan or a business loan?
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.
What are the disadvantages of a business loan?
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.
Can a personal loan be used for business?
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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