Personal loans are usually unsecured, and anyone can take one out for almost anything. Business loans are crafted for a specific business venture or need, and you might have to put up collateral to secure your loan.
- Business loans are a source of funding that’s used exclusively for business-related expenses.
- Personal loans are made out to the borrower directly and can be used for personal and/or business purposes.
- Personal loans are better for business owners who don’t have the credit history to secure a business loan, whereas business loans are better for those who need to borrow larger sums of money.
A business loan is made strictly for your business. It’s usually made to your company—not to you personally—and has different eligibility requirements, interest rates, and terms.
Pros of Business Loans
- Longer repayment terms. Loans offered by the U.S. Small Business Administration (SBA) have repayment terms as long as 25 years.
- Higher maximum amount. You can borrow up to $2 million in SBA loans. Some banks and lenders have different maximum amounts that might be higher or lower than the SBA amount.
- Different loans for different needs. There are several different types of business loans that may be more or less useful based on what you need the money for. These include SBA loans from the government, working capital loans to pay for operating expenses, equipment loans, and more. Different lenders offer different types of business loans, so you can take out the ones that are the right fit for your company.
Cons of Business Loans
- Higher threshold to qualify. For business loans, your business credit score and history are checked to see if you’re eligible. If your business doesn’t have any credit history, you might have a harder time qualifying for a business loan.
- Could take longer to get. You might need to wait several days or even weeks to get your business loan approved. If you need funds right away, this might be too long.
- You might need a personal guarantee. A personal guarantee on a business loan means you hold yourself personally responsible to repay your business loan in case your company can’t. This means your personal credit score and history are checked, and if you can’t repay the loan, your score will take a hit.
You can use a personal loan for almost anything you need. While you can use personal loans for business-related expenses, you can also use them for other things that are impacted by your business, so you’re not restricted to only company-related needs.
Pros of Personal Loans
- Use for almost anything. Personal loans are personal, so you can use them for almost anything, including startup business costs. But you can also use that money for expenses that aren’t related to your business.
- Quick approval. Most personal-loan lenders offer a pre-qualification process, which allows you to see if you’re eligible without completing a full application (which requires a hard inquiry, causing a short-lived decrease in your credit score). After you complete the actual application, you’ll typically find out right away if you’re approved.
- Fast funding. Depending on your lender, funds can be deposited within a day or two.
Cons of Personal Loans
- Shorter repayment terms and lending amounts. Different lenders have different loan terms, but many cap your repayment terms at five, seven, or even 10 years. If you need to borrow a lot of money—say, upward of $100,000—your monthly payments could be too much to afford. Most lenders cap the amount you can borrow at $40,000 or $50,000, which means that if you need more, you’ll need to look elsewhere.
- Higher interest rates. Personal loans tend to have higher interest rates than business loans. Right now, the average rate on a personal loan is more than 11%. Traditional banks typically offer business loans at around 6% to 7% interest.
- Harder time building business credit. While a personal loan can help you build your personal credit score and history, it doesn’t do much for your business. Even if you use the money for business-related expenses, all those on-time payments won’t build up your business credit score.
Key Differences Between Personal Loans and Business Loans
You can use a business loan for business-related expenses, including payroll, equipment, startup funds, and more.
A personal loan can be used for a mix of personal and business needs, which you might require if you’re just starting out as a company.
Where to Get One
You can get both personal loans and business loans from many banks, credit unions, and online lenders. Some banks might have business-oriented loans, while others might have more general lines of credit.
The amount of money you can expect to receive from a personal loan varies by lender, but you can generally expect them to go as low as $1,000 and as high as $40,000 or $50,000.
Business loan funding also varies by lender. Some go as high as $500,000, while others offer even greater amounts, such as $2 million or even $5 million.
Personal loan eligibility is based on your credit score and history. The higher your credit score, the more likely you are to qualify for the lowest interest rate available. The lower the score, the less likely you are to qualify.
Eligibility for business loans is tied to your company’s business credit score and history. If your business is still new, you might not have these. Some banks use your personal credit score and history to qualify for a business loan, but you might need to sign on as a personal guarantor that says you’re personally responsible for repaying the loan if your business can’t.
Some personal loans are secured, in that you can put up savings or a certificate of deposit (CD) account as collateral, but your loan limit is usually tied to how much is in those accounts. Most business loans are unsecured, but some lenders offer secured business loans. Collateral for secured business loans is typically tied to business assets, such as real estate, equipment, or inventory.
Personal loans tend to have higher interest rates than business loans. Right now, personal loan interest rates average around 11.5%, while average business loan interest rates are just over half that number.
Length of Loan
You can take out a personal loan for three, five, or sometimes seven years. A few lenders will have longer terms, going upward of 10 or even 12 years, depending on the purpose of your loan.
While some business loans might be short-term ones that you’ll need to pay back within one to five years, many business loans have terms as long as mortgages (i.e., upward of 25 or even 30 years). Because there are many different types of business loans, repayment terms can vary as well.
There are no tax benefits for personal loans. Depending on where you live, the interest paid on business loans might be tax deductible.
Should I Choose a Personal Loan or a Business Loan?
A personal loan makes sense if:
- You don’t have a business that can yet borrow money on its own.
- You don’t have a business credit score or history to prove your business is eligible for a loan.
- You need funding for a mix of business and personal reasons.
- You don’t want to put up any collateral to secure a loan.
- You need money right away (i.e., within the next few days).
A business loan makes sense if:
- You want your business to build and maintain credit.
- You need to borrow a lot of money.
- You want the lowest interest rate available.
- You could benefit from longer repayment terms and more loan options.
- You can afford to wait to get the money, as it can take awhile for funds to be deposited into your account.
Can I use a personal loan for business, and vice versa?
While you can use a personal loan for some business-related expenses, you can’t always use a business loan for personal needs. There are some work-arounds, like if purchasing a certain item or need that directly impacts your business. An example of this is buying a phone so you can communicate with customers, but one you also use for personal needs.
Can I have a personal loan and a business loan with the same lender?
Yes, you can have a personal loan and a business loan with the same lender, as long as it offers both of those services. You might have better odds of being approved by an institution that you already do business with since they can evaluate your current status with them to see if you’re eligible.
What is the difference between a business loan and a line of credit?
A line of credit operates like a credit card. You can pull money out on an as-needed basis and pay it back regularly. A business loan is a lump-sum amount deposited into your business’s bank account, where you’ll make minimum payments on your loan until it’s paid in full.
The Bottom Line
While both personal loans and business loans are available for business-related expenses, the one you should choose depends on your needs—not only professionally but also personally. If possible, find the ones you’re eligible for with the best repayment terms before completing a full application.