Running a small business has plenty of challenges. As a small business owner myself, I have to juggle managing clients, getting my work done, making sure that I get paid, and figuring out how to grow my business.
Many times, business owners need to borrow money to continue the growth of their businesses. Some need to invest in new equipment, open a new location, or buy more inventory.
When you are a small business owner, you can borrow money in many ways. You may decide to go the traditional route and attempt to get a business loan to finance your company’s needs. Alternatively, you may be able to take out a personal loan to get the money you need quickly. Here’s what you need to know about these two options to figure out which is right for you.
Business loans vs. personal loans
|Business loans||Personal loans|
|Loan length||Extremely short to decades||One to seven years|
|Loan amount||Small to millions||$1,000 to $100,000|
|Interest rates||Varies but generally lower than personal loans||Varies but generally higher than business loans|
|Personal guarantee||Usually required||Always required|
|Application process||Longer and more cumbersome||Quicker and easier|
|Secured or unsecured||Can be either||Usually unsecured|
|Builds business credit||Usually||No|
|Keeps business and personal finances separate||Yes||No|
When borrowing money, the length of time you want to repay the loan is an essential factor. Depending on the loan type you get, this can vary.
Business loans have many different loan lengths depending on the purpose of the loan. Some types of short-term financing can be used to purchase inventory. If that inventory quickly turns over, the loan could be extremely short, such as 30 days. Other types of business loans, such as an equipment loan, can be taken out for a decade for equipment that lasts a long time.
Personal loans are generally more uniform in their repayment periods. In general, most personal loans must be repaid in one to seven years. There are rare cases where you can find shorter or longer personal loan terms, but these are less common.
As with the loan length, business loan amounts can vary wildly depending on their purpose. Loans for inventory can be a few thousand dollars while loans to purchase expensive equipment could go into the millions.
Personal loans typically offer loan amounts starting at about $1,000. Most personal loans cap out around $50,000 or less, but some offer as much as $100,000 in rare cases.
Interest rates for business loans vary based on the purpose. That said, business loan rates are generally lower than personal loan interest rates if everything else is equal.
Personal loan interest rates are highly dependent on your credit. People with excellent credit can get relatively low interest rates if they fit the lender’s other criteria. That said, personal loans can have interest rates well into the double-digit percentages for people with less than ideal credit.
Business loans may require you to personally guarantee the loan in case you default on it. This means the lender can come after your personal assets if your business doesn’t repay the loan as agreed. In general, newer businesses without a credit history are virtually always required to sign a personal guarantee. Established companies with stellar credit history may not have to sign a personal guarantee, though.
You and your credit guarantee all personal loans. If you default and don’t make payments as agreed, the lender can attempt to come after your personal assets for the amount you owe.
Getting a business loan is an arduous process in many cases. Lenders want to make sure the loan will get repaid so they require a lengthy application and a lot of proof. Expect to have to submit financials for your business, submit to both a company and personal credit check, and to have to provide other requested documentation.
The additional documentation required for these loans means borrowing money is usually a slow process. It can take quite a while from a loan application being submitted to receiving the funds you need. This is especially true for larger loans.
Applying for and receiving funds for a personal loan is usually a much faster process. These loans often have smaller loan amounts and less paperwork to fill out. You’ll need to submit to a credit check, share your income, and other information the lender requests. Loans sometimes get processed virtually instantly, and you can get the funds as quickly as the same day in some cases. In other cases, it may take a few days, or weeks, to get the loan proceeds in your bank account.
Secured or unsecured
Business loans can be secured, meaning you must put up collateral the bank can seize if you do not repay the loan, or unsecured, meaning the bank has no specific asset it can repossess. Secured loans generally come with lower interest rates, but increase the risk that your asset may get seized if you don’t repay the loan.
Personal loans are almost always unsecured loans. This means they often come with higher interest rates. Even though the lender can’t seize a specific asset, they can go after you for any unpaid amount if you default on the loan.
Builds business credit
Business loans taken out with a business’s identifying number may help your company build credit. Check with the lender to see if they report payments and loan activity to the business credit agency you’re looking to build credit with. If you apply with your Social Security number instead of your business’s identifying number, it won’t build business credit.
Personal loans do not build business credit in any way. They may impact your personal credit score, though.
Keeps business and personal finances separate
A business loan without a personal guarantee can keep your business and personal finances completely separate. This is important for business owners who want to keep their personal lives protected from the liability of their business. Business loans may require a personal guarantee, which could expose an individual to liability from the loan.
Personal loans entwine personal and business finances. This can complicate bookkeeping and could expose your personal assets to risk from the company.
Where to find business loans or personal loans
You can find business loans and personal loans at a wide variety of lenders. In addition to banks and credit unions in your area, several online lenders exist. Here are a few options you may want to consider.
- Monevo – Monevo allows you to submit information once and get several personal loan quotes at one time. Then, you can choose the best option for your needs.
- Fiona – Fiona works much like Monevo by giving you several personal loan quotes with a single submission of your information. After seeing the quotes, you move forward with the personal loan that makes the most sense for you.
Why should I choose a business loan or a personal loan?
Ideally, business loans were designed for use by businesses and should be used when it makes sense. They can be used to keep business and personal finances separate, which is essential to limit personal liability. You may be able to borrow money at a lower cost and receive a longer repayment period, too.
On the other hand, personal loans provide flexibility and can usually result in receiving funds much quicker. The loans often come with lower loan amounts, have shorter repayment periods, and higher costs. They can be helpful if your business is brand new or hasn’t yet established business credit, though.
The decision about whether a personal loan or a business loan is better for you will depend on your business’s circumstances and needs at the time of the loan. Here are some general reasons why you may choose each type of loan.
Business loans are best for…
- Building business credit.
- Keeping personal and business finances separate.
- Taking out larger loan amounts.
- Taking out longer loan lengths.
- Using funds for specific business purposes, such as receivables factoring.
- Getting secured loans.
- Getting lower interest rates.
Personal loans are best for…
- People who need a quicker application and approval process.
- Smaller loan amounts.
- Shorter loan lengths.
- People that don’t mind mixing personal and business finances.
Business owners can typically choose between a business loan and a personal loan when borrowing money to fund their business. Business loans were designed for this purpose but can be more cumbersome to get. Thankfully, the added burden usually comes with friendlier loan terms.
Personal loans are generally easier to get approved for and can often be disbursed faster but come at higher costs and less flexible loan terms.