They say it takes money to make money. Learn whether a business loan vs. personal loan is the right choice for your company.
Small business owners and solopreneurs could all use more cash.
Instead of asking your friends and family to invest in your company (again), you could take out a business or personal loan.
If you’re approved, you’ll have a lump sum of money deposited in your account to help fund your climb to the Fortune 500 list.
Which one’s better for reaching your company’s goals?
While all loans essentially work the same, there are differences between business loans vs. personal loans that warrant a heads-up.
Business Loans 101
Business loans can only be used to pay for business-related expenses and purchases, such as to help your company:
- Add more inventory
- Update equipment
- Hire staff
- Open additional locations
- Purchase another business
- Build out your website
- Boost marketing and outreach efforts
- Kickstart product development
Here’s the Good News
A business loan will allow you to:
Borrow higher amounts of money
Keep business and personal finances separate
You cannot have funds from a business loan deposited in your personal checking account; the cash can only be routed to a business account.
While this may be an issue if you’re still using your personal account for work, it keeps your business and personal finances separate.
Apply for a business loan and your business becomes the borrower, not you.
If you ever stop repaying the loan, your business will be in default and you will not be personally held accountable for the debt (unless you personally guarantee repayment of your business loan).
A business loan doesn’t show up on your personal credit report or affect your credit score either.
Build credit for your company
Make all your business loan payments on time and lenders will know you’re responsible rather than risky. The more credit you build with a lender, the easier it will be for you to borrow higher loan amounts and qualify for lower rates in the future.
Here’s the Bad News
Business loans are:
Very hard to qualify for
Lenders know businesses have a high fail rate, which makes a business loan high-risk.
While requirements vary by lender, to qualify for a small business loan you generally need:
- At least $100,000 in annual revenue
- A credit score of 620+
- To be established as a business for at least two years
These standards separate less risky candidates from high-risk applicants for lenders, but they also make it near impossible for startups to qualify for a business loan.
If your business does meet these minimums, you’ll still need to convince lenders you can pay back the money you want to borrow.
For a business loan approval to go through, you’ll need to provide documentation for your:
- Overall business plan
- Ideas for spending the money
- Tax returns — both individual and business
- Bank statements from your business (and sometimes personal) account
- Annual financial report or statement of finances
You may also need to check in with your lender quarterly or annually so they can see how you’re progressing on these goals compared to your debt.
Required to have collateral
Business loans are secured loans, which means they’re backed by a financial asset your business owns known as collateral.
Collateral can be anything from your company’s inventory and real estate to equipment, cash savings, and more.
If you ever fall behind on your payments or stop paying back your business loan completely, the lender has the legal right to seize those assets listed as collateral as a form of repayment.
Many startups fail this round of the loan approval process because they don’t have any collateral.
This may tempt you to personally guarantee a business loan using your own property as collateral. But if your business is forced to close up shop and defaults on the loan, this risky move gives lenders the right to take your car, house, or whatever you put down as collateral.
Usually slow to pay out
Business loans can take a minimum of 60 to 90 days for approval and your money could take months to hit your business account. This period is sometimes longer if your loan amount is higher than the norm.
While certain lenders approve and fund business loans in as little as 24 hours, they’re generally not recommended if you need cash ASAP, such as to make payroll or take advantage of a limited-time opportunity.
If you’re looking for a faster and easier option to add cash to your business, a personal loan may be a better fit.
Personal Loans 101
A personal loan works just like a business loan — except the money goes into your personal account so you can use it however you want.
Most people take out personal loans to help pay for:
- Student loan debt
- Home improvements
- Credit card debt
- Medical bills
But if you’re a small business owner, you can use the cash from a personal loan to finance your hustle.
Here’s the Good News
Compared to business loans, personal loans are:
Easier to qualify for
Lenders for personal loans mainly use two factors for approval:
- Your personal income
- Your credit history (and credit score)
These two elements give lenders an idea of how risky you are as a borrower and whether you’ll be able to pay back your loan within a certain period of time.
Lenders for personal loans will not ask for a business plan or financial statements related to your company. This means qualifications like revenue and years in operation won’t matter in their decision.
As long as you have decent credit and an average salary or better, you may have a much easier time qualifying for a personal loan than a business loan.
Faster if you need cash soon
Since the approval process is simpler and requires less paperwork, personal loans are typically approved and the funds added to your account in a few business days to a week.
Not required to have collateral
The majority of personal loans are unsecured so they don’t require collateral.
This means you won’t have to give lenders a financial asset to back your loan, like your car or home. There’s no risk of losing your business or personal possessions if you default on a personal loan.
You won’t have to keep your lender in the loop with annual reports and financial statements after your personal loan is approved like you may with a business loan. Keep making payments and you’ll probably never have a check-in with your lender after your approval.
Here’s the Bad News
Will affect your credit
Because you’re personally guaranteeing to pay it back, personal loans will show up on your credit report. They will also count in your debt-to-income ratio.
Depending on your credit score and utilization, this extra debt may lower your creditworthiness and make it harder to get approval to finance a new car, take out a mortgage, or apply for a credit card.
Personal loans also mean you’re on the hook for making payments even if your business doesn’t make money. If you can’t pay off your loan and become delinquent, your lender can send you to collections.
Not paying back a personal loan will all but destroy your credit score — and that can take years to get right again.
May not offer the lowest interest rates
Personal loans typically have lower APRs than business loans and credit cards, but only applicants with awesome credit scores and a history of stable income will be offered the lowest interest rates.
People with lower credit scores and average salaries may not be approved for a personal loan, or face very high interest rates if they are approved. Higher interest fees not only eat away at your profits but also add up to paying more for your loan overall.
Have smaller loan limit amounts
Unlike using business assets and revenue to determine your loan amount, lenders will only use your salary and credit history to figure out how much personal loan you can afford.
If you don’t have much to offer, it will be very difficult to score a loan worth more than $50,000 to $100,000. That may not be as much as your business needs but it’s certainly a start.
Both business and personal loans have their advantages and disadvantages. The trick is knowing which is best for your situation.
Business vs. Personal Loans: Which Is Right For You?
Use these checklists to see whether a business or personal loan fits your needs best.
Go With a Business Loan If You…
- Lead an established company with steady growth and revenue
- Need a large amount of money
- Want to keep business and personal finances separate
- Don’t want to mess with your personal credit
- Have enough business collateral
- Want to establish credit with your business lender
- Don’t need the money ASAP
- Want the business tax credits for your interest payments
Does a business loan tick all your boxes?
Go With a Personal Loan for Your Business If You…
- Are a startup or very new in business
- Need cash right away
- Intend to ask for less than $100k
- Don’t want to risk losing any collateral
- Have good or better credit, low debt, and a decent salary
- Don’t mind risking your personal credit
Does a personal loan work better for your needs?
No matter which loan you choose:
Always Compare Rates for Business vs. Personal Loans Online
Don’t waste time meeting with lenders in person for a loan approval. Save your gas money and compare offers from multiple lenders online on your time.
Since lenders each use different criteria for approval and rate decisions, the only way to make sure you’re getting the lowest rates and best terms for your loan is to shop around.
You never know which lender has your best option until you get out there and start plugging in the numbers.