Business loans vs personal loans: How they compare
Businesses looking to drive future growth may need to acquire capital for loans. But should your business choose a business or personal loan?
Whether you’re an entrepreneur with a great idea but lacking the necessary capital to get your business off the ground, or you want to fund the growth of your existing business, you may be looking to acquire capital.
In that case, you’ll want to consider applying for a loan. But first, you’ll need to know what type of loans are available to you, and also what the benefits and potential drawbacks of each type of loan are.
You could be eligible for a personal loan or a business loan, depending on your situation.
Throughout this article, we’ll explain the pros and cons of each, to help you decide which loans will benefit the growth of your business throughout this year and beyond.
This is a type of loan available to individuals, usually in a fixed amount, borrowed at a fixed rate over a set period of time.
Personal loans are also known as unsecured loans. With an unsecured loan, you borrow a sum of money from a lender, with the promise to pay it back over an agreed set time period in fixed monthly repayments.
Unsecured loans are so named because they are not secured against any asset you own - this is why personal loans are often a lesser sum than secured loans.
Advantages and disadvantages of personal loans
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Can I use a personal loan for business?
Although personal loan implies personal individual use, in some cases they can be used to fund a business.
Some lenders will allow you to use a personal loan for business purposes, usually for more indirect needs and remember they will base your affordability on your personal finances, not of your business.
However, the majority of lenders separate their loan products into business loans and personal loans. Each type carries different interest rates and eligibility criteria.
When applying to a personal lending provider for a business loan keep in mind that they will require the details of how you intend to spend a loan. If your business reason does not fall into their lending criteria then you will not be eligible, so make sure you check first.
» MORE: Business funding options
Advantages and disadvantages of using a personal loan for business
Personal loans can be used to fund a business, but what are the arguments for and against using a personal loan to inject capital into your business?
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What can a personal loan be used for?
A personal loan can be used for pretty much any significant purchase, as personal loans usually range from £1,000 – £30,000.
Whether you plan to renovate your home, fund a wedding or inject capital into your business, a personal loan can come in useful.
Personal loans are popular because their interest rates are usually lower than credit cards. However, this is not always the case. Always check the comparative interest rates between lenders and all the finance options at your disposal before committing pen to paper.
» COMPARE: Low APR personal loans
Personal loan vs business loan rates
Personal loan interest rates are usually higher than business loan rates. One of the reasons is because of the different application processes involved.
A personal loan can usually be taken out within a few days, taking a week at most to process. In conjunction, lenders tend to charge individuals with a personal loan higher rates than business loans to mitigate risk.
Business loans, however, are less risky for lenders because of information typically revealed by the lengthy application and eligibility process, which means lenders are more confident that businesses can pay back the entirety of the loan. Therefore, business loan interest rates are lower, and the total repayment period is usually longer.
Business loans are a potential route to capital for growing businesses. They can be either secured or unsecured, depending on the circumstances of your business, especially whether you have assets like physical premises.
Most business loans have a limit of £5 million and start with as little as £500.
What can business loans be used for?
Businesses usually use these loans as liquid funds to purchase supplies, inventory, equipment and machinery.
Business loans cannot be used to pay existing debts or fund the purchase of offices or land.
If you have any doubts about what a business loan can be used for, check out our business loan FAQs, for clarification.
Or check our ultimate business loan guide, if you're convinced that this is the most appropriate form of finance for your business. You’ll learn how to prepare for a business loan application and much more, to ensure you’ll get the best deal to drive the next wave of strategic growth for your business.
» COMPARE: Business loan deals
Business loan vs mortgage
As mentioned earlier, business loans cannot be used to purchase property. For this purpose, you’ll need to take out a commercial mortgage.
This type of loan can only be used to pay the mortgage on your office space or other business premises, and can’t be used to finance business expenses.
» COMPARE: Commercial mortgages
What you need to be accepted for a business loan
There are several criteria you need to pass in order to qualify for a business loan:
- Healthy turnover and profit, indicating the ability to keep up with repayments
- Appropriate loan amount compared to turnover
- Trading history records
- Credit and payment history
- Business accounts history
- Proof your business is UK-based
- Most business loan products will only lend to businesses that have been trading for at least two years
Advantages and disadvantages of business loans
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How to choose between a business loan or a personal loan
As you can tell, choosing between a business loan and a personal loan is not clear cut. However, the choice becomes simpler when analysing the circumstances of your business.
To ensure you make the right choice for your business, you need to evaluate a number of factors.
Firstly, consider the size of your business and your trading history. How much growth are you trying to drive? Knowing this will determine whether the smaller sums provided by a personal loan will be sufficient, or whether you should apply for a business loan to receive more capital.
Another key consideration is timeframes. How quickly do you need the money? Might the long application and vetting process of business loans be counterproductive? If so, a personal loan may be more appropriate, for you to quickly invest finance in your business.
Another point to review is whether a secured loan is an option for your business.
The benefit of a secured loan is the ability to access larger amounts of funding and having a longer time period to pay it back. With a secured business loan, you will be able to get a significantly higher cash injection than with an unsecured personal loan.
Ultimately, when choosing between a business loan and a personal loan - it will all depend on your business’ individual circumstances.
Taking a look at our loans comparison table is a great way to compare the benefits of various loans, and find the ideal loan for your business.
Peter reports on a number of areas in the personal finance sector, with a particular interest in supporting businesses and individuals in the UK services industry. Read more