Business v. Personal Loans: Which is Right for You?

Making the choice between a business loan and a personal loan depends entirely on your circumstances. Here are some facts about each that should help guide you in the right direction.

Personal Loans

Personal loans are issued to individuals and are approved based on the income of a person. They’re typically a fixed amount with a fixed rate to be paid back over a set amount of time. When applying for this type of loan, lenders will review your debt to income ratio, credit score and personal income in order to determine the interest rate and fees that will be associated with your loan. These are usually lent as unsecured loans. This means the borrower is not required to put up any assets as collateral. It also means that the amount of the loan typically won’t be as large as it could be if you were securing the loan with personal assets.

Personal loans can be used for essentially any major purchase. The average personal loan ranges anywhere from $1,000 to $25,000 sometimes going as high as $50,000. People generally use them to pay for things like weddings, vehicles, and home renovations or additions. They’re popular options for borrowing because the interest rate is typically lower than you can get on a credit card.

You can use a personal loan for business expenses in some cases. However, depending on the terms of your loan, you might only be able to use the money for indirect needs relating to your business. Additionally, the amount you can borrow likely won’t be as high as it could be with a business loan because it only takes your income into account- not your business earnings.

Business Loans

How does a business loan differ from a personal loan? An article written by Peter Adams and Connor Campbell for nerdwallet.com explains, “Business loans are a potential route to capital for growing businesses. They can be either secured or unsecured, depending on the circumstances of your business, especially whether you have assets like physical premises. Business loans often start from $1000, and can sometimes run into the millions.”

These loans are typically used for things such as new equipment and/or machinery, purchasing supplies and purchasing inventory. It’s a way to get liquid assets in hand in order to buy things that will help get the business started, keep it afloat or run more efficiently. Keep in mind that businesses with a large amount of debt will have a more difficult time trying to secure a business loan. Also, some lenders won’t give money to businesses that are newer. Always double check before applying for a loan that you meet the qualifications. Doing this research before you get started with applications will save you a lot of time.

Securing a business loan requires specific information that you have to provide the lender in order to get your application approved. You’ll need to prove things like a healthy turnover and profit which indicates the ability to keep up with repayments. Your loan amount request must be appropriate compared to what your business is making. Credit and payment history, company accounts, and sales records are also taken into consideration. This will prove to any potential lender that you can afford to repay the loan or have considerable assets to leverage against the amount in the event you default.

Assessing your Needs

Making the choice between a business and personal loan comes down to your individual circumstances and needs. Ask yourself what you need the money for. If you’re trying to grow your business, it’s important to figure out what your goals are. How much are you wanting to grow? Write down measurable steps to get there. Assess how much money you think it’s going to take to accomplish your goals. Do extensive research on everything you want to incorporate so you know exactly how much money you’ll need. Research lenders and find out which loans have the most favorable terms. Check to see if you can get a secured loan for your business. This takes the financial liability off of you personally and puts it onto your business. This means your personal finances won’t be affected even if you can’t make your loan payments.

There’s a lot of information you’ll need to collect before deciding whether a business or personal loan makes the most sense for you. However, doing your due diligence will greatly benefit you in the end.