Personal Loan vs. Business Loan: Which Is Best for Financing a Small Business?

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?

Feature(s) Personal Loan Business Loan
Avg. Loan Amount $1,000 to $50,000+ $100,000 to $1million+
Avg. APR Range 5% (good credit) 36% (poor credit) Based on age & profitability
Repayment Terms One to Five years Three to Ten years
Secured No Yes (company assets)
Limitations At borrowers discretion Business expenses only

Pros & Cons of Using a Personal Loan vs. Business Loan

Although the application process and time to secure a business entity loan may be daunting, the benefits outweigh the inconvenience.

For example:

  • It does not show up as an obligation on your credit records, so your life continues as usual.
  • It does not create a lien filed against personal assets.
  • Enables one loan to cover your funding needs.
  • Longer repayment terms reduce the payment burden on your business cash flow.
  • If you secure a business credit line, the loan limit renews as the balance is reduced.

And this last one is a biggie!

  • TAX BREAK. The interest paid on the business loan is a business expense written off against profits resulting in lower taxes.

Launching a small business or expanding an existing one is an admirable goal and, for the economy, an important one.

According to the US Small Business Administration; “Small businesses are the lifeblood of the U.S. economy: they create two-thirds of net new jobs and drive U.S. innovation and competitiveness. A new report shows that they account for 44 percent of U.S. economic activity.”

As Walt Disney said; “If you can dream it, you can do it.

David Cole David Cole Last update:
For over 17 years, Dave has been a business coach, teaching owners how to succeed in the digital economy. He is also an in-demand speaker for webinars and live events covering various business topics dealing with Internet marketing. Dave is also the author of a course on using LinkedIn to find your ideal prospects. He is an avid outdoor photographer and hiking enthusiast living in the desert southwest.