Business Loan v Personal Loan: Which is Right for You?

Many entrepreneurs and small business owners question whether they should be getting a business loan or a personal loan for their financing needs. Ultimately, it depends on the use of the funds. While a personal loan can be obtained for any number of financial needs, a business loan will have much stricter standards and borrowing rules.

Some people might say that it’s “common sense” to get a business loan when you need business financing, but that’s not always an option for everyone. It’s important to understand both lending products and what they offer so that you can choose what suits your needs best. 

Small Business Loans

Several small business loans can provide funding for new businesses. These funds can be used for payroll, purchasing equipment, investing in marketing, or even for purchasing or constructing the building where the business will operate. The U.S. Small Business Administration even has its own collection of business loans available for small and mid-sized businesses (SMBs) that are just starting out.

Business loans are available for both short-term and long-term borrowing and come in secured and unsecured forms. Usually, you’ll have to submit financial statements, projections, and other paperwork to apply for the loan, and additional documentation may be necessary for final approval.

A business loan can be borrowed for just a few weeks or 20 or 30 years, depending on the type of loan and its terms. The amount available from these loans also varies, with some loans available for as much as $5 million or more. The caveat for new businesses, of course, is that personal credit may play a factor in determining approval for business lending.

Personal Loans for Business

Personal loans are simpler and more direct than business loans. They’re also more generic, in that you can use them for just about anything that you want. You’ll have to submit your personal financial information and choose the amount of funding you want to apply for. Personal loans for business use are generally given for $1,000 to $50,000, but they could be larger if the individual qualifies.

Personal loan terms usually range from 12 months to more than five years (60 months), again depending on the type and amount of the loan in question. The biggest disadvantage to using a personal loan for your small business funding is that if you fail to pay, your personal credit will be impacted and you’ll be personally responsible for repaying the loan, even if the business fails. 

How to Choose

If you’re still not sure whether you need a business loan or a personal loan, here are some things to keep in mind.

A personal loan makes sense if:

·  You have no collateral (or none that you want to use), since most personal loans are unsecured.

·  You have a new business with limited (or no) credit history.

·  You need money quickly, since business loans take much longer to fund.

A business loan makes sense if:

·  You need to borrow a lot of money.

·  You don’t want to put your personal finances or assets at risk.

·  You want to build your business credit.

You can also consult with a financial advisor regarding your small business and how to best finance it. Or, apply for one or two of each type of loan and see what kind of results you get. That will give you a better idea of how to approach funding your small business.