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

Business Loan vs. Personal Loan

• Personal Loan

  When an underwriter is looking at your qualifications for a personal loan, they’re really only concerned with two main items:

  • Your personal credit history
  • Your personal income

  The rate, term length, and dollar amount for which you are (or, possibly, aren’t approved) all rest on these two factors. If you personally bring strong personal credit and personal income to the table, you generally make a solid candidate for a personal loan.

  But with that in mind, you only have two legs to stand on here. So, if those two factors presented to the lender don’t paint a stellar picture, you’ll want to have more info to help them evaluate your risk. Which is exactly what happens in business loans.

• Business Loan

  Small business lenders factor in lots of other data points when they make their decisions on whom to loan money to. Yes, personal credit will still play a major part in the decision. Your credit score effectively serves as your financial report card, and it’s the most helpful way for a lender to evaluate your risk (short of knowing you since you started handling money).

  But there are many other parts of your small business loan application, too. Loan underwriters will look at your business’s profitability, cash flow, industry, time in business, and more when they decide whether or not to extend you financing. And all of these business traits help inform underwriters what sort of rates, terms, and amounts they can offer.

  With more factors to look at than just credit history and income, each point of data takes on different weights in the equation—meaning that no single point is usually the defining yes-or-no factor.

• You're a Startup or New Business

  Lots of brand-new businesses are looking for small business startup loans to kickstart their growth—hiring, office space, prototyping, you-name-it. But the reality is that the overwhelming majority of business loans require at least a few months of business history before they consider extending funding. So in this situation, you may have no other choice than to take out a personal loan.

  Also be sure to look into a long 0% intro APR business credit card to help you get off the ground with initial startup costs. But if that won’t get you the kind of money that you need, and you (or other founders) have excellent financial credentials, a personal loan for business could be an excellent alternative. This can tide you over with the lump sum, and allow you to build up your business’s credit history. (In other words, get that business credit card no matter what.)

• You Get a Lower Rate

  In certain other cases, you might apply for both a small business loan and a personal loan—and find out that a personal loan is less expensive for your business. And, as a business owner, you’re looking to get the lowest cost of capital for your business. So, for a loan, that comes in the form of a better interest rate and term.

  And if your personal credentials are stronger than what you can offer to a business underwriter, it’s entirely possible that the personal loan you can qualify for will be able to beat cost of the business loan you’ve qualified for. The thresholds are different for every candidate based on their credit profile—but this is a possible scenario.

• You Have a Lot of Money Saved Up

  Speaking of getting a better deal, if you have a lot of money in your personal savings account, or if you have a high income, you’ll likely get a better rate on a personal loan than you would on a business loan. Again, it’s in your best interest to go with the loan product that is less expensive for you and your business.

• You Need Money Fast

  Because the application process for a personal loan is simpler than it is for a business loan (just your personal credit and personal income), you can likely get approved for a personal loan faster than you would a business loan. While this shouldn’t be your determinant when deciding between a business loan vs. personal loan, it is a factor to bear in mind.

• You Don't Want to Put Up Collateral

  The best personal loans are unsecured, which means you don’t have to put up any collateral to secure the loan. If you’re a small business just starting out on the other hand, you’ll like have to put up some kind of collateral. If you don’t want to risk any of your business assets (or personal assets if your loan agreement includes a personal guarantee) then a personal loan is probably a better option.

• You're Okay With Risking Your Personal Credit

  If you take out a personal loan for business purposes and something goes wrong, your personal credit score is going to take a pretty big hit. This could affect your ability to acquire financing in the future. With a business loan, on the other hand, late payments or default will (in most cases) only affect your business credit score.

  To summarize everything we’ve just explained, personal loans are a possible option if you have high credit, low debt, and a big salary. You’ll have to make sure you’ve weighed the risk of putting your own personal credit on the line, since the loan will be entirely in your name. But you also might not have an option, too, if you’re a startup or new business that doesn’t have enough time in business or business credit history to secure a small business loan.

  If some or most of this sounds like you, a personal loan very likely is the right solution to get your business the money it needs.

• You Want to Keep Business and Personal Finances Separate

  As a small business owner, the lines between your business and personal lives can very easily bleed together. That doesn’t mean your finances should. In fact, we’re going to go out on a limb here and say don’t mix personal and business finances. Not only is separating out transactions a massive headache for your accountant come tax time, but you actually won’t get the all of the legal protections afforded to you as a business entity if you don’t draw the line. And the other reason it’s so important? If you’re after business-specific financing, you basically can’t get a small business loan without a business bank account.

  For both of these reasons, taking out a business loan that you are going to use for business purposes can save you a lot of trouble.

• You Want to Limit Your Liability

  Depending on your business entity type, you’re liability might be more limited with a business loan vs. personal loan. For example, if you structure your small business as a limited liability company (LLC), you won’t be held personally liable for the business’s debts and obligations. With a personal loa, you are held liable.

• You Want to Build Business Credit

  If you’re applying for a business loan as a new business, you’re personal credit score will undoubtedly be a factor during the underwriting process. However, taking out a business loan will help you build business credit over time, which will show future lenders that you are able to pay back your debts on time.

• You Need a Big Loan

  Because personal loans are for personal reasons, it’s rare that you’ll get one in excess of $50,000. After all, outside of mortgages, there aren’t a lot of reasons anyone would need more than a $50,000 loan. With business loans, on the other hand, it’s possible to secure loan amounts of much higher than $50,000. After all, business expenses cost more than personal expenses.

• You're Looking for Something Other Than a Term Loan

  Typically, personal loans are term loans. You take out a loan, and you have to pay it back in a certain amount of time plus interest. With business loans, on the other hand, there are a variety of different financing products available—be it equipment financing, a merchant cash advance, invoice financing, or an SBA loan. This variety means you can find the loan product that best fits your needs.

• You Want to Build a Relationship

  It’s easy to envision your business becoming a billion-dollar company. It’s not as easy to picture needing lots of small business loans on the road to getting there—but it’s likely that you’ll need them.

  One of the biggest perks of taking on a business loan vs. personal loan is the relationship that it creates. The same way customers build a relationship with your business, your lender builds a relationship with you as the borrower. So, when the time comes that you need more funding—and with better terms—having an established history with a lender that knows you and how responsible you’ve been with their money can only help.

  Personal loans don’t build that kind of rapport. In that sense, they’re often better served as solutions to a one-off problem.

  There are thousands of costs that come with ramping up a business, especially in the first several years. And that almost always affects the criteria that personal loans are based off of: credit, debt, salary. Your credit score will likely take a hit as you pump funds into the company. And it’s very possible you’re not making money when your business is in growth stages, too.

  With a business loan, on the other hand, lenders will look at a plurality of criteria when making a determination—meaning you’re more likely to get something that makes sense for you and your business.