It’s generally more difficult to get a business loan vs. a personal loan. That’s because personal loan lenders really only consider your personal credit history and your income. In comparison business lenders will look at a slew of factors including your personal credit score, your business’s profitability, cash flow, financial statements, time in business, and what industry you’re in.
When you’re a small business owner looking for money, you usually look to two common avenues for funding: a business loan vs. personal loan. 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 making a decision between a business loan vs. 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.
How do business loans vs. personal loans compare? 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, well, 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 business loan vs. personal loan personal 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 business loan vs. personal 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.
If there’s one thing to take away from what you’re about to read in detail, the central difference between a business loan vs. personal 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.
There’s a certain time and place for a business loan vs. personal loan.
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. 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.
After this, you should be able to figure out where you are in your own business lifecycle.
Now that you know the differences between business loans vs. personal loans, let’s explain the situations in which you should take one over the other, starting with personal loans. Here are good reasons to take a personal loan:
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.)
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.
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.
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.
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.
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.
For a loan that you are going to use for business purposes, there are a lot of great reasons to take out a business loan as oppoed to a personal loan. Let’s lay out the situations in which you’d want to take out a business loan vs. personal loan:
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.
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.
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.
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.
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.
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.
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.
Whichever route you go, make sure you:
If you do these things, you’ll lay the foundation for success now and in the future.
Forest was on the customer success team at Fundera. As a Loan Specialist, he works directly with small business owners throughout the loan process, helping them find the best financing for their companies.