The difference between personal loans and small business loans
Personal loans are secured through your personal credit history. This often makes them easier to obtain than a small business loan if you have good credit, which can factor in both a personal and business credit score.
Personal loans and small business loans come in different types of loans, ranging from mortgages and auto loans to lines of credit and installment loans. In general, personal loans are intended for personal purchases, while business loans are intended to finance purchases related to the business.
What can a personal loan be used for?
Personal loans can generally be used for anything.
Although lenders may ask you for the reason for your request, in most cases, you will not agree to spend your loan funds on anything specific when you take out a personal loan. Some lenders have restrictions on the use of their personal loans, so be sure to read the fine print before applying for a loan.
Benefits of personal loans
Easier approval – You may find it easier to get approved for a personal loan, especially if you haven’t been in business for a very long time.
Faster financing – Personal loans tend to require a lot less paperwork and documentation, so the approval process is shorter and you get your funds faster.
No warranty – The best personal loans are unsecured, which means you don’t have to post any collateral to withdraw a loan. On the flip side, many business loans require you to put up assets in order to secure the loan, especially those with favorable interest rates.
Small business loans
What can a business loan be used for?
Business loans may have more restrictions on their use, such as the use of funds for business-related purchases. These can include updating technology and equipment, purchasing new inventory, paying rent for commercial space, hiring new employees, marketing your business, and even marketing your business. cover your daily business expenses.
Ultimately, your business loan should be used for purchases that will generate additional income – ideally enough to offset the cost of interest. Some lenders will also allow you to use business loans to refinance or pay off existing debt.
Benefits of small business loans
Separate finances – Keeping your personal and business finances separate is essential, and taking out a business loan helps you do that. Not only will this save you a lot of time during tax season, it could also save you a lot of money in the form of tax deductions.
Limit your liability – Depending on your legal structure and the type of business loan you take out, your liability may be more limited than with a personal loan in the event of default or inability to pay.
Build business credit – Taking out a business loan instead of a personal loan will help you develop your business credit and show future lenders that you can repay your business loans responsibly.
Larger loan amounts – If you need a larger loan, you may want to consider business loans. Personal loans rarely exceed $ 50,000, and even that amount can be difficult to obtain.
Lower interest rates – If you qualify for the best business loans, you will likely get a lower interest rate than a personal loan. According to Nav, the interest rates for commercial loans from traditional lenders range from 2% to 13%, while the interest rates for personal loans range from 6% to 36%.
Can I use a personal loan for businesses and vice versa?
You can usually use a personal loan to cover your business expenses. Keep in mind that you are still personally responsible for repaying this loan – not your business – and it might be more difficult to separate your finances this way.
On the other hand, some business loans can prevent you from using your funds for unprofessional expenses. Others are less restrictive and make it easier for you to get paid in the form of a salary thanks to your business loan.
How to get approved
The approval process is slightly different for personal loans and small business loans. In most cases, it will be easier to qualify for a personal loan, while the small business loan application process will take longer and will require more comprehensive paperwork and documentation.
Get approved for a personal loan
The personal loan approval process generally requires that you have good credit and a stable income. You will also need to prove that your debt-to-income ratio is low enough to shoulder the burden of the loan you are applying for. If you don’t have good credit, consider taking out a secured loan, which requires some form of collateral.
Personal loans tend to be smaller than small business loans: personal loans tend to be in amounts ranging from around $ 1,000 to $ 50,000. The term of loans on traditional personal loans generally ranges from two to seven years.
Get approved for small business loans
You will need excellent credit to qualify for a small business loan, and lenders may even want to see your personal and business credit scores. You will also need to be able to show adequate annual income, and most lenders will want to see that you have been in business for a while. There are lenders online that offer more expensive business loans to people who have not been in business for a very long time or who do not have good credit scores.
Lenders will also need more documentation for small business loans, including proof of your profitability and cash flow. You will need to specify exactly what the loan is for, and some lenders will also ask you to submit a business plan. Finally, you will need to provide them with information regarding your legal structure and documentation of all required business licenses and permits.
If you qualify for a small business loan, it may be easier to get approved for large loans than with a personal loan. Many institutions offer small business loans ranging from $ 5,000 to $ 500,000 and some even offer loans over $ 1 million. Loan terms vary widely and can range from six months to 25 years.
Choose what is right for you
Banks, credit unions, and online lenders all offer both personal and business loans, and the Small Business Administration also offers government-backed small business loans. Deciding between personal loans and small business loans and choosing which lenders to borrow from depends on your business history, credit, and business goals.
If you have an established business and want the lowest rates …
Conventional business loans offered by banks and credit unions generally offer the lowest interest rates. These are ideal, but the application process is long and it is not easy to get their approval. You will need to have an established business and excellent personal and business credit, and most of the time, you will also need to have enough assets to put up as collateral.
If you have a newer or riskier business and want the lowest rates …
Small Business Administration (SBA) loans are a great option if you can qualify. These are loans issued by a bank but guaranteed by the government. In other words, the government agrees to repay 85% of the loan in the event of default.
For this reason, start-ups and riskier businesses that are not approved for conventional business loans may be eligible for an SBA loan from a bank or credit union, and you typically won’t. to provide warranty. You will always benefit from the lowest rates on the market. Keep in mind that this process is long and can take weeks or even months.
If you’ve got a brand new business and great credit …
People who are just starting out and haven’t been in business long enough to qualify for a business loan or SBA loan might consider a personal loan. These can be used for business purposes, and as long as you have excellent personal credit, you will still be entitled to reasonably low rates. You can also consider financing your startup with a 0% introductory APR credit card, but make sure you can pay it off before the promotional period ends.
If you need cash quickly …
Online lenders tend to disburse funds faster than traditional banks, and some offer small business loans. Personal loans are the fastest to fund, with some online lenders offering same day approval and next day financing. Pay close attention to rates and terms when it comes to online lenders. They can be quick, but many charge much higher interest rates, so the time you save might not be worth it.
If you have bad credit …
Online lenders and alternative finance often offer loans to people with bad credit. However, in order to protect against the risk of lending to someone with bad credit, these lenders will charge insanely high interest rates and may even require additional collateral. Options such as payday loans and title loans are among the worst culprits and are extremely expensive.
Small business loans can offer your business the opportunity to finance its growth at low rates and on favorable terms. However, don’t be discouraged if you’re turned down for a business loan from a traditional bank. There are many alternatives, from personal loans to SBA loans and online lenders. Just be sure to do your research and go for low cost financing options where possible.