When you’re starting a small business, you may need to finance your venture. But which type of loan is best for your needs, personal or business? The answer depends on several factors, including the size of your loan and how you plan to use the funds.
This article will look at the key differences between personal vs. business loans to help you start a business and decide which one is best for your small business.
Personal Loan vs. Business Loan
You should be aware of a few key differences between personal loans and business loans before you decide which type of loan is right for you. The most obvious difference is that personal loans are meant for individuals, while business loans are strictly for business purposes.
The application process and eligibility requirements for a business loan will differ from a personal loan.
If you’re looking for a small loan to cover start-up costs, a personal loan may be the right option. Personal loans are often easier to qualify for than business loans.
Personal loans are generally best used for short-term financing needs. However, because the loan amounts are smaller, you may find that it takes multiple personal loans to aggregate the amount of funds you need.
If you require a more significant loan amount or long-term financing, a business loan may be better. Business loans are available in several different forms, including traditional term loans and lines of credit. These loans tend to have lower interest rates than personal loans because the lender secures the loan with business assets i.e., equipment, accounts receivables, real estate, etc.
Lenders will often want to see that your business has a solid track record and is profitable before they’ll give you a loan. The lender may also require that your small business functions as a legal entity such as; a Limited Liability Company (LLC) or a C corporation.
What is a Personal Loan?
A personal loan is a fixed-term loan primarily used for personal expenses, such as medical bills, home improvement projects, or unexpected expenses. Personal loans are available from banks, credit unions, and online lenders, and they typically have terms of three to five years.
The amount you can borrow with a personal loan depends on your credit score and annual income. If you have good credit and a high enough income, it will be fairly easy to borrow a large amount of money for any purpose (like starting a new business).
Personal loans generally do not require collateral, so they carry more risk for the lender than secured loans. For this reason, individual loan rates are higher than rates on secured loans such as an auto loan or a mortgage.
What is a Business Loan?
A business loan is used strictly for business purposes and generally requires some collateral that has value. The lender can take possession of the collateral if you fail to make payments or meet other obligations. Collateral can include real estate (such as office buildings), equipment (computers), inventory (sellable), and other movable property to be liquidated in case of default.
The loan terms, including the interest rate, repayment schedule, and fees, are all set by the lender. Business loans address various needs, including start-up costs, equipment purchases, inventory, or working capital.
With the funds from a loan, you can invest in your business and grow it without having to put personal funds at risk.
Another advantage of business loans is that they can offer tax breaks. Interest on business loans is often tax-deductible, which will in-turn save money on your taxes. Before taking out a business loan, comparing offers from multiple lenders is essential and determining which option is best for your needs?