Personal Loans VS Business Loans: Which Funding Option Is Right For You?

Before you start your search for the right lender, there’s one important decision you need to make: will a business loan or personal loan better suit your needs?

In this post, we’re going to look at the pros, cons, and key differences between personal loans versus business loans. With this information, you’ll be able to make the choice that’s best for your financial situation.

What Is A Personal Loan?

A personal loan is money that is borrowed from a bank, credit union, online lender, or other institution. Payments are made on a scheduled basis over a set period of time until the principal (borrowed) amount is repaid, plus fees and interest charged by the lender.

While a personal loan is generally used for personal expenses (such as paying bills, car repairs, vacations, or emergencies), some business owners opt to take out a personal loan to use for business purposes.

These loans typically don’t require collateral, can be used for any reason, and can be obtained completely over the phone or online from non-traditional online lenders.

What Is A Business Loan?

Similar to personal loans, business loans are funds that are borrowed from a financial institution or other lender. However, borrowers must own a business and must use loan proceeds on approved business expenses.

There are various types of business loans, including short and long-term loans, equipment loans, SBA loans, and commercial real estate loans. Business loans can be obtained from traditional lenders (such as a bank) or through an online alternative lender.

Personal guarantees and/or collateral are typically required as a condition of receiving a business loan. You will have to also specify how you plan to use funds since loans must be used for business purposes.

The Key Differences Between Personal Loans VS Business Loans

Exploring the pros and cons of business loans and personal loans should give you a good idea about some of the differences between these two types of funding. But let’s break these differences down further to help you decide which option is right for you.

Application Process

In most cases, the application process for personal loans is going to be much faster than it is for business loans. The business loan application process is typically more detailed and requires additional documentation that isn’t necessary for a personal loan.

Borrower Requirements

Borrower requirements are quite different for business loans and personal loans. Personal loans only require personal information, including credit score and income.

Business loans may require business documentation such as past income tax returns, financial statements, and a business plan. Borrowers will also have to meet personal credit, business credit, revenue, and time in business requirements set by the lender.

Collateral

Specific collateral isn’t required for unsecured personal loans, although you will be held personally liable if the loan goes into default.

For a business loan, specific collateral, a personal guarantee, and/or a blanket lien may be required, which could put your business and personal assets at risk if you’re unable to repay the loan.

Distribution Of Funds

Funding timelines vary by lender, but in many cases, a personal loan hits your bank account faster than a business loan. An exception is for smaller business loans through non-traditional lenders.

Interest Rates

Interest rates tend to be higher for personal loans, especially if you don’t have a strong credit history.

On the other hand, borrowers with good to excellent personal credit that have a new business may find lower rates with a personal loan than with alternative business lenders.

Repayment Terms

Repayment terms vary by lender, but personal loans typically have much shorter repayment terms. A personal loan usually has repayment terms of less than 10 years, while some business loans offer repayment terms of 10, 20, or 25+ years.

Personal Loan VS Business Loan FAQs

The Bottom Line On Personal Loans VS Business Loans

When it comes to loans, every business has unique needs. What works for one business might not work for your own. Before even seeking out a lender, determine if your business can afford a loan and if the loan will truly help your business grow. Then, carefully weigh out the pros and cons of business loans versus personal loans to find the best match for your specific circumstances. Finally, you’ll be ready to find a lender to fund your loan.

Once you’ve decided to move forward with a loan, make sure to do your research and compare rates. Start your search with our top personal loans and best business loans to find the best option for your business.