Business Loan Vs. Personal Loan: Which Is Better For Your Small Business?

From business credit cards to loans, there are several ways to get additional funds and invest money into your business. One might think that they can only consider business loans if it's a business investment. Immediately people start comparing SBA loan vs commercial loan and think they have no other options. However, small business owners often consider personal loans rather than business loans. Both these options are great for company owners who don't want to give up their equity or ask investors for more funds. But which loan should one choose? A personal or business loan? Or consider an SBA loan vs bank loan? This article explains the differences between different types of loans for small businesses.

Understanding A Personal Loan

Before we dive into the topic of business credit vs personal credit, let's see what each loan offers. A personal loan is a loan available to most individuals. Typically, a personal loan has a fixed amount from the bank or credit union. A personal loan also has a fixed interest rate over a set period, for instance, five years.

A personal loan is an unsecured loan. A person goes to a bank, asks for a personal loan, and gets a sum of money from a lender. They sign a contract that obliges them to return the money over an agreed set period in fixed monthly payments.

What does an "unsecured" mean? It's a type of loan that isn't secured against any asset a borrower owns. For instance, if an individual gets a secured loan against an apartment and fails to pay funds back, they may lose an apartment. 

Understanding A Business Loan

So, a business loan or a personal loan? Let's figure out what is a business loan. Typically, people request business loans when they want to launch a business. The loan they get works as the initial capital. However, business owners often request this type of loan when they want to expand their businesses, cover some expenses, etc. Sometimes, companies have a negative cash flow and need extra funds.

A business loan starts from around $1,000 and can go up to millions! People can use this type of loan only for business-related expenses. 

The Difference Between Business and Personal Loans

When it comes to business vs personal loan, the most significant difference is the usage. Here's an example: Mark received a business loan, and now he can use these funds for business-related expenses, such as:

  • payroll;

  • supplies;

  • materials to produce products;

  • repair of equipment/machinery;

  • other similar expenses.

Mark can't spend a business loan on buying a personal car. If Mark applies for a personal loan, he can spend achieved funds more freely. Use a personal loan if you want to make a purchase related to business, but it's not considered a business expense. For example, buying a house closer to your workspace isn't a business expense, but it might benefit your business. 

Check the table below to understand the difference between business loan and personal loan.

Differences

Business

Personal

Use of funds.

Fund only direct business expenses. 

Fund direct and indirect business expenses. 

Tax deduction.

Based on the law, a business loan may be deductible. 

Not tax-deductible. 

Period.

Longer period. 

Shorter period. 

Amount.

Up to millions of dollars. 

Up to $100,000.

Collateral. 

Need a collateral. 

Do not need collateral. 

Now you know more about personal loan vs business loan differences. Consider all pros and cons for your business before borrowing money. 

What Type Of Loan Is Right For You?

So, business loan versus personal loan: which one to choose? Banks, credit unions, and online lenders offer business and personal loans. But which option is better? Here are a few situations to consider:

  • You have an established business. If you want the lowest rates, consider a business loan. Most banks offer the lowest interest rates for established and financially-healthy businesses. However, it's critical to have a good credit history and assets to put as collateral. 

  • You have a new or risky business. If you still want a loan with the lowest rates, consider an SBA loan. It's a business loan and stands for a Small Business Administration loan. Simply put, the government agrees to pay back 85% of the loan if a business defaults.

  • You launch a new business and have a great credit history. Consider a personal loan if you can't qualify for a business loan but have a good credit score. Individuals can also consider 0% introductory APR credit cards, but paying the debt off is critical before the promotional period end.

  • You need money fast. Consider an online lender. Some online lenders offer relatively low-interest rates and even business loans. It's quicker to borrow money from online lenders rather than waiting for the bank's approval. 

So, now you know more about a personal loan vs small business loan. In some cases, it's easier to get a personal loan than a business loan, but it may come at a higher cost. If you're thinking, "should I get a business loan?" consider the factors mentioned above. 

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