Small Business Loan vs. Personal Loan: How to Choose

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’re just getting started.

Here are some important things to consider when comparing these two financing options.

Small business loan vs. personal loan: A comparison

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. Amortization periods vary, with some banks offering up to five years and government small business loan programs offering up to 25 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 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:

Pros and cons of business loans and personal loans

Small business 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.

Personal loans

It’s often easier to be approved for a personal loan than a business loan. In many cases, the approval process for a small business loan includes an evaluation of the current success of your business, while a personal loan will focus on your individual finances.

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 advantage of personal loans is that most of them are unsecured, while small business loans require collateral. To arrange small business financing, you’ll likely have to provide something of value that the lender can take possession of if you’re unable to repay the loan.

Alternatives to small business loans and personal loans

While a small business loan or personal loan might do the trick, there are a few other sources small business owners can turn to for loans:

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.