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When you’re a small business owner looking for money, you usually look to two common avenues for funding: business loans vs. personal loans. And both of these options can work, whether you’re trying to take on a new project, bolster inventory, or make your invoices liquid.
Especially for new business owners, whose options for small business loans might be fewer, there’s a lot to think about when debating which of these two financing options is right for your specific business. You’ll need to know which questions to ask when deciding between a business loan vs. a personal loan, plus which factors should be the ones that tip the scales.
It’s important to know the factors to consider before making a business decision—or any decision for that matter. Above all, the use of the funds. Second, how your loan weighs on your credit score. Next, the criteria of the underwriting process. And last, but certainly not least, thinking about building a financing relationship for your business’s future.
We’ll unpack all parts of this decision—business loan vs. personal loan—so you’ll be in a position to make a choice and get the capital to grow your business.
Small business loan products are made for certain use cases. In other words, personal loans for personal needs. Business loans for business needs. Both personal and business loans offer a variety of products—starting with easier-to-qualify-for lines of credit, through big long-term loans that can take you through many years. But the exact use case of the loan will always tie back to the business itself. The same way it wouldn’t make sense to apply sunblock in the dead of night, it also doesn’t make sense to get a student loan to finance an equipment purchase.
The easy answer is anything! Especially if it’s going to help grow the business and boost revenue. You can finance inventory, renovate, open a new location, or even buy an existing business. That said, you’ll want to have a specific plan in place to put a loan to use.
The slightly-more-nuanced answer is that there are several different forms of business loans, and some are meant for very specific use cases. (Examples include equipment loans, which are just for financing equipment purchases, and invoice financing, which is just for your accounts receivable.) Other loans have few-to-no restrictions on them. So, your loan’s structure and terms will be determined by your use case.
A personal loan is a lump sum deposited into your checking account ready to be used as you see fit. Personal loans can come in different forms, all dictated by how you’ll be using the funds you get.
Does this sound familiar? That’s because personal loans are just like business loans… but for, you know, personal things. And that’s because, if you run a business, it’s very important to keep personal and business financial matters separate (more on that in a bit). So, people often use personal loans for things like help with student loans, home improvement, medical bills, car payments, etc.
Technically? Yes. Although the way you actually get financing for a personal loan vs. a business loan is based off of different criteria, money is money. And as long as you’re spending the cash within the terms of your loan, you can do what you want with it.
But the risk in using a personal loan vs. a business loan for the same thing is different. For instance, if for some reason you can’t pay back the principal on your loan, the responsible party—you guessed it—becomes a personal vs. business matter. Which means that, if you default, the lender will look to seize collateral from you personally, rather than your business, or the other way around. So, this decision has to be made really carefully.
→Too Long; Didn’t Read (TL:DR); Business loans are used for business matters, and personal loans for personal matters. Otherwise, they’re not too different, except that they have different implications—and different responsible parties—if you default.
If there’s one thing to take away from what you’re about to read in detail, the central difference between a personal loan vs. a business loan is this: They’re based off of totally different criteria.
When an underwriter is looking at your qualifications for a personal loan, they’re really only concerned with two main items:
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.
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.
→TL:DR; Lenders use different factors when approving borrowers for personal loans vs. business loans. There’s more involved in the equation for a business loan application—but you’ll pretty much always have to have business history to be considered.
There’s a certain time and place for a business loan vs. a personal loan. After this, you should be able to figure out where you are in your own business lifecycle:
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 them. 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.
If you don’t have a business bank account, you can apply for one right now (and even be eligible to claim a $200 bonus from Chase checking, too). Go ahead:
Apply for a Business Bank Account
The business-loans-for-business-matters, personal-loans-for-personal-matters rule works for a lot of business owners to help them decide whether or not they should go for a business loan vs. a personal loan. For other small business owners, however, it’s not quite that straightforward. If you’re among them, don’t feel lost or alone if things still feel a little gray.
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.
First, think about 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.)
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.
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. a 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.
You should take a personal loan if…
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 should take a business loan if…
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.
→TL:DR; Personal loans are great for startups without business history, or potentially less expensive for owners with strong credit. Business loans have advantages, including building history with a lender, and a lot more for borrowers with average income and credit.
Hopefully you have clarity around whether a business loan or a personal loan for business is right for you. The next step, really, is figuring out the type of loan that’s the best fit for your business.
You can go ahead and see options for loans you’re qualified for now to help get you started, too.
See the Loans You Qualify For
Whichever route you go, make sure you:
And you’ll lay the foundation for success now and in the future.