Whether you’re hoping to launch your first small business, or looking to expand your existing small business, a loan can be a useful tool. But which kind of loan is the best tool for the job?
Small business loans may offer advantages like lower interest rates and higher loan amounts, but a personal loan may be easier to qualify for, especially if you are just getting started. Here are some important things to consider when comparing these two financing options.
What is a small business loan?
A small business loan is a form of financing that provides capital, often in a lump sum, to be used for the creation or expansion of a small business. Loans for small businesses in Canada may have variable or fixed rates, and amortization periods of up to 30 years.
Small business loans can be used for a variety of business needs, including: buying equipment and supplies, and purchasing property. Business loans also help your business build credit.
However, business loans can be harder to qualify for than other types of loans, especially if you are a first-time entrepreneur. Many small business loans require collateral.
What is a personal loan?
A personal loan has no specific conditions for use. The money borrowed for a personal loan can be spent as you see fit, though it’s most common for personal loans to be used for big, short-term expenses such as a home renovation or wedding. However, personal loans may also be used to consolidate high-interest debt as they tend to have a lower interest rate than other financing options (especially credit cards).
Personal loans can be either secured or unsecured, and are available from traditional lenders such as banks or credit unions, as well as alternative lenders.
Small business loan vs personal loan
|Small business loan||Personal loan|
|Common uses||Franchise costs.|
Commercial real estate.
Working capital costs.
High-dollar purchase (car, appliances, etc).
Expensive life events (wedding or funeral).
To pay off high-interest debts.
|Where to get||Where to get one|
Private or alternative lenders
|Typical loan limit||Up to $5,000,000 depending on the lender, borrower and type of small business loan.||Up to $50,000, depending on lender|
|Typical interest rate||Around 5.5% on average.||Average rate is around 10%, depending on credit profile.|
|Typical qualification requirements||
Small business loan or personal loan: Which is right for you?
The loan option that’s right for you will depend on how much you need to borrow, what you hope to do with the money, and your personal and professional financial profile. For example:
- If you have good credit, collateral, and need to borrow more than $50,000 to buy new equipment for your existing restaurant, a small business loan might be the better choice.
- If you have fair credit, little-to-no collateral, and want to borrow less than $50,000 to finance the launch of your new e-commerce business, a personal loan might be the more accessible choice.
Pros and cons of business loans and personal loans
For entrepreneurs who can meet the qualification requirements, a small business loan often has several advantages over a personal loan. For one thing, a small business loan can help build the creditworthiness of your business over time, whereas a personal loan will not.
Another advantage is that small business loans typically offer higher maximum loan limits. Just because more money is available doesn’t mean you should take it without a plan, of course. But, since small businesses tend to require a lot of capital, especially in the start-up phase, that access to extra money can be very helpful.
On the other hand, small business loans are much harder to be approved for than a personal loan. In many cases, the approval process includes an evaluation of the current success of your business. If you’ve been in business for a year or less, you’ll represent greater risk in the eyes of a lender. In this case you may not be approved for a small business loan right away and will have to turn to other financing options.
Another thing to note is that the majority of the time your small business loan will require some sort of collateral, meaning something of value that the lender could take possession of, if you’re unable to repay the loan. Personal loans, on the other hand, can be unsecured.
Alternative financing options to consider
While a small business loan or personal loan can do the trick, there are a few other places in which small business owners can look for loans. To start with, the Government of Canada offers grants to small businesses started by First Nations, New Immigrants, and more. You can search out some options here.
Some banks also offer loans specifically for Black entrepreneurs, female entrepreneurs, First Nations entrepreneurs and more. So, do some research and talk to local financial institutions to see if your small business can be better served by any of these smaller, more specialized loans.
The difference between a line of credit and a loan is that a loan is borrowed as a lump sum, while a line of credit can be used and repaid on an ongoing basis.
Personal assets include anything you own that has monetary value, personal value, or both. Assets play an important role in determining your net worth and estate planning.