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Business Loans vs. Personal Loans: A Comprehensive Guide



When looking to fund a small business, small business loans might be what most business owners think. But in this article, we’ll compare business loans vs. personal loans and uncover some benefits of both types of loans that you might not know.

Depending on several factors, one might fit you better than another. As you’ll see throughout this article, there are several variables that can impact your small business if you opt for a personal or business loan offer. Learn all you need to know about business loans and personal loans, as well as:

And much more along the way. After reading this article, you’ll have all the information you need to make the best-calculated decision for your small business.

A Quick Introduction to Business Loans and Personal Loans:

Personal Loans:

You obtain a personal loan by evaluating your personal credit score, and the eligibility factors are typically more relaxed. Most often than not, a positive credit score is enough for lenders to approve the loan — even for a small business owner.

Personal loans can come in an array of forms — from auto loans to land loans. Putting it simply: they come in any program that you could use for personal use. A factor you must take into account as the loan amount won’t be too substantial.

Business Loans:

Business loans tend to be a lot more restrictive in the way to use your loan amount, all lenders will demand a reason for the loan request, and it must be for business reasons. To summarize, you can only use your loan in ways that will generate revenue for your small business. That’s not guaranteed, of course, but lenders will only pass your loan request if they see a high probability of that happening.

A business owner has access to several small business loan programs — as you’ll see a few later in this article. Small business loans also have a longer and more difficult application process. But they can provide your small business with a higher amount of capital.

Can You Use a Personal Loan For Your Small Business?

The traditional use of personal loans tends to be for personal reasons, but there’s no reason you can’t use them for your small business. Although the lender might ask for a reason, they don’t use it as an eligibility factor to process your loan request. Although, you should read your loan contract carefully, as some personal lenders do, and use it as an eligibility factor.

And What About Small Business Loans, Can They be Used for Personal Reasons?

Small business loans are a lot more strict. There’s a very lengthy eligibility process that looks at many factors that can approve your loan application. Factors like business credit, personal credit, financial history, cash flow, business industry, time in business, and more. You have to present a business plan to the lender and explain how you’ll use the loan amount for your small business.

Business Loan vs. Personal Loan: Advantages and Disadvantages:

Business Loan Advantages:

Business Loan Disadvantages:

  • Lengthy and Difficult Application Process: Business loans have an application process that’s difficult to go through. It’s also time-consuming, with a lot of back and forth, and one failed eligibility step can send your loan request down the drain.
  • Might Require a Personal Guarantee: It’s not unheard of to use a personal guarantee — for example, real estate — to help you secure your loan request if your business credit score isn’t the best.
  • Most Business Loans Have an Origination Fee: Your lender will likely add an origination fee. This fee covers a myriad of business financing processes, from underwriting to the loan term paperwork. It can go from 0.5% to 5% and more, and if you don’t account for it on your end, it can put a dent in your repayment terms.

Personal Loan Advantages:

  • Easy Application Process: Personal loans are easy to apply to, and if you have a solid personal credit score, you’ll most likely see your loan offer approved.
  • Fast Funding: These loans take 5-7 business days to be approved and get funding — depending on the lender. That makes them a good option for a short-term injection of capital.
  • No Need for Collateral: There’s no need to risk your workplace real estate by collateralizing it. Most personal loan lenders only need an excellent credit report to approve your loan.

Personal Loan Disadvantages:

  • Significantly Shorter Loan Amounts: You won’t have a significant injection of capital with personal loans, so if you are considering high levels of expansion, this loan will not be for you.
  • Not Meant For Small Businesses: As the name says, personal loans are meant for personal purchases. If you go with this offer, it’ll be very challenging, for example, providing payroll or buying equipment.
  • Don’t Improve Your Business Credit Score: If you have bad credit, this option will not help you improve it. If you want loan offers with better terms and higher amounts, you have to build your business credit score, and there are other options available.

Business Loan vs. Personal Loan: What do Lenders Look For Approval:

It’s important for you to know what lenders expect from their borrowers, as it increases the possibility of seeing your loan request go through. As such, small business owners need to fill in the shoes of their lenders and what they expect from their loan offerings. Let’s look at each of those cases:

Small business loan:

As you saw throughout this article, small business loans can offer you some of the best conditions to improve your small business, expand it, and buy equipment, among other needs it might require. But you also saw that the application process is thorough and challenging. Most lenders require a set piece of eligibility standards that business owners must have for loan approval.

Small business loans have a lengthy and strict loan application process. Lenders prefer to lend to established businesses with solid business purposes, business expense reports, and cash flow. But also with good credit — business credit and personal credit — and more deciding factors.

Traditional lenders require that borrowers have solid eligibility factors, and present a business plan explaining the business purposes of the loan term. On the other hand, if you need business funding and don’t have these requirements, you can also apply for alternative lenders such as online lenders. These lenders can still offer you competitive loan interest rates — like Biz2Credit.

Personal loan:

Personal loans are easier to apply for — lenders usually require good credit from the borrower — personal finances and income statements, a debt-to-income ratio (DTI) no higher than 40%, and other basic verification documents. But on a higher personal loan amount, your lender might deem it to be a secured loan, for which you’ll have to provide collateral or a personal guarantee.

If that situation develops, it might be better for you to look for other financing options — in this case, a small business loan. Although it’s a lengthier and more difficult application process, you can minimize it by providing collateral to corroborate your request and have access to more capital.

Which Type of Loan Benefits Your Small Business the Most:

You Should Use a Personal Loan if:

  • You’re a new business: If you’re a new business or startup, acquiring a small business loan might be very difficult. But on the other hand, getting approved for one of the many personal funding options available might allow you to get a small injection of money that can be vital to make small advancements.
  • You require fast funding: A personal loan, more often than not, doesn’t need much time to be processed. Also, if the money you need isn’t much and you need it fast, it can be a much better option than a time-consuming small business loan.
  • You don’t want to put collateral: If your personal loan request isn’t secured, you don’t need to provide collateral. It’s a good option if you need capital without wanting to put your real estate or equipment at risk.
  • You don’t need to build business credit: While building business credit is advisable for any small business owner, if you need fast funding and already have solid business credit, it’s a good, fast option. Another good option could also be with Biz2Credit — which allows you to get up to $2.000.000 in funding in 72 hours, plus help you build your business credit score.

You Should Use a Small Business Loan If:

  • You require more capital for your small business: Personal loans can’t provide you with the capital banks or the Small Business Administration can. If you need a larger injection, you must look at lenders that provide small business funding.
  • You have a solid business credit score: With excellent credit, you’ll avoid higher interest rates and smooth monthly payments on your loan request, as well as an easier application process. That, in conjunction with the loan value, it’s much better than a personal loan.
  • You want to separate your finances: Since business loans are a business-specific financing option, it’ll be much easier to separate your business and personal finances come tax season. It’s one less headache for small business owners.
  • You want to limit your liabilities: If you have a limited liability company (LLC), it will allow you to decrease your personal liabilities if you opt for a business loan vs. personal loan. With this option, you won’t be deemed personally reliable for the loan amount, but with a personal loan, you will.

Some Examples of Business Loans and Personal Loans for Your Small Business:

Line of Credit:

A business line of credit allows a business owner to have a lump sum of cash in their business bank account — which can go up to $100.000 for unsecured lines of credit or more for secured ones —and only pay interest on what they end up using. A great and fast option for those unpredicted financial holes, but you must be careful with some lenders’ interest rates as they can be substantial.

On the other hand, a personal revolving line of credit is similar to a business line of credit, as it allows you to borrow money up to a credit limit, but you’ll have a due payment every month, although you can opt to pay in full.

Credit Cards:

Business credit cards vs. personal credit cards are also very similar — save for a few exceptions. Business credit cards tend to have a higher credit roof and can offer discounts on business-related options such as small equipment financing, office/ industrial supplies, advertising, phone bills, etc.

Personal credit cards have a smaller credit offer and have bonuses in personal options such as clothing brands, traveling, restaurants, etc.

Secured and Unsecured Loans:

When choosing a loan term between a business loan vs. personal loan secured and an unsecured option, any small business owner will have a myriad of choices, lender and loan term alike. The best option is what you deem best for your small business.

Although personal loans are faster and easier to acquire, they tend to offer a smaller credit option than small business loans. That, in conjunction with a secured option, can help you facilitate the application process for a business loan, and can help you refinance it later. Even if you don’t have a solid business credit score, you can opt for alternative lenders, which leads us to our next topic:

You Don’t Have to Choose a Personal Loan or Put Your Personal Assets at Risk Due to Bad Business Credit:

Even with bad credit, there are other loan products outside financial institutions that a small business owner can go after. Alternative lenders offer you business loan options that have an easier qualifying process — even if your personal credit history or business credit history isn’t the best.

And as such, you can always reach out to Biz2Credit and apply for a loan term that can make a difference in your small business. Not only will you qualify without overly restrictive eligibility factors, but you’ll also get funding fast and improve your business credit score. And when traditional institutions and credit unions tighten loan requests due to an economic downturn, this can prove decisive for your small business.

So, if you need funding, don’t hesitate and contact us today! Do the same as Loveleen, owner of Simply Beautiful Medspa, that thanks to Biz2Credit, in her own words: “helped us get the financing we needed to make our vision a reality.” If you need to do the same, don’t hesitate! Contact our small business funding expert and find the best funding option for your small business!

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