Using loans to fund your business has its benefits and drawbacks. But if it's the course you decided on, you have an additional choice: Will you take out a business loan or personal loan?
A small business loan tends to have better terms, and is best for established entrepreneurs. A personal loan is best when you're just starting out and want to avoid the high interest rates that come with credit cards.
Because business lenders want you to meet some strict requirements, it pays to know the differences between these two types of loans so you can make an informed decision.
Business loan vs. personal loan: Finder's verdict
When it comes down to it, there is no single right answer. Every business is unique, and small business owners need to take the time to understand their full range of financing options.
But to make it easier, here are the basic facts before we delve into the five big differences.
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| 1 year in business, $10,000 or more monthly revenue | Good to excellent credit, regular source of income, low debt-to-income (DTI) ratio |
Business loan vs. personal loan: 5 main differences
There are five factors that should influence your decision when choosing between business loans and personal loans.
1. Personal loans offer a simple application process
If you're looking for a quick application, personal loans are the better option. Because a personal loan relies more on your credit score and income, it tends to be easier to be approved for a personal loan. A self-employed business owner will likely be asked to provide two years of tax returns as proof of income.
Since most lenders want to see detailed revenue projections and a business plan, there are more steps to apply for a business loan. However, business loans are larger. Most lenders will only work with businesses that meet minimum revenue and time in business requirements.
New businesses may still need to use a personal loan for business expenses until you meet a lender's criteria.
2. Business loans typically offer better value
In general, small business loans are the better choice when it comes to value. Filing taxes, budgeting and qualifying for additional funding later are all made easier when you separate your business and personal finances. You'll also be able to borrow more with a business loan while building a relationship with a lender — two things that could greatly benefit your business in the long run.
But using a personal loan for business can also be a worthwhile strategy. Your personal credit history and debt-to-income ratio are the main factors a lender considers — not your time in business. For business owners who have struggled to get a business loan, personal loans are a valuable way to build up your business before it qualifies for more traditional small business loans.
3. Business loans offer more flexibility
Business and personal loans are both flexible options depending on how you use them. Personal loans usually don't limit how you use your funds, but a lender may require you to set aside a certain amount for debt consolidation or other purposes. And some lenders won't let you borrow if your loan will be used for business purposes.
A small business loan may be used for any business expense, with few exceptions. You can use your funds to pay for inventory, employees, taxes and other common costs. Online lenders are particularly flexible when it comes to how you use your business loan. This makes business loans a better choice when you're looking for a lender that understands how businesses grow and handle money.
4. Personal loans are unsecured — business loans may not be
Personal and business loans both offer unsecured options, but personal loans are typically unsecured. You won't need to provide any collateral with most providers, especially online lenders. Loan terms depend on your personal credit score and general finances, not assets you can use as collateral.
On the other hand, business loans may be secured or unsecured. Your interest rate may be lower if you opt for a secured business loan, but loan amounts are generally the same. The Small Business Administration, or SBA, offers a competitive unsecured option if you qualify. However, your business history and business finances will play a big role in the approval process, so scoring an unsecured loan will depend largely on your business credit.
Business options also still require a personal guarantee, even if you don't have to put up collateral. That means if your business can't pay off the loan, you're still personally responsible for the amount due.
5. Personal loans can be used for business
You can use a personal loan to cover a business expense, but you should understand the risk: A bank, credit union or online lender can still seize your personal assets if you default. With that in mind, a personal loan may be easier to qualify for than a business loan — especially if you have a strong credit score.
Most importantly, business loans tend to be more restrictive. It only works one way. Using a personal loan for business expenses is accepted by many lenders. But using a business loan for personal expenses is generally against your loan terms.
Business loan vs. personal loan: How to choose
A small business loan is the better choice for established businesses with strong revenue. You get access to better interest rates, build your business credit history and have a loan for your business that is designed to cover regular expenses.
For new businesses, opting for a simple application process that relies on your personal credit history may be the smarter move. You won't be building your business credit, but personal loans may still help you improve your personal finances while also funding your startup.
When to consider a business loan
Business loans beat out personal loans on most occasions. Since you'll be working with a dedicated lender than understands small businesses, you have a better chance of getting the right loan.
Your business has an established financial history
If your business has used a business credit card or smaller business loan in the past, you may be able to qualify for lower interest rates. Lenders want to know that you have personal experience in the industry and handling debt. So a credit card or other type of loan under your business's name will improve your chances of getting approved.
Your business can put up collateral
Small business loans typically require collateral, although some online lenders may offer unsecured term loans and SBA loans are almost always unsecured. The interest rate you get an a secured loan will be lower than with an unsecured business loan or a personal loan.
But keep in mind that providing collateral won't mean you aren't liable. Lenders frequently require a personal guarantee from anyone who has a 20% or higher stake in the business.
You need to cover specific business expenses
Loan amounts are significantly lower when you use a personal loan. If you have a particularly big expense, look into a business loan. Small business loans are meant to cover common expenses like payroll, taxes and expansion. And in many cases, you can finance equipment or inventory through a business loan — something that may be out of reach if you choose a personal loan with a smaller loan amount.
You want to build a relationship with a lender
One of the biggest benefits business loans offer is the relationship you start with a lender. It's not guaranteed, but many lenders consider your business's positive payment history favorably and may offer lower loan rates because of it.
You want to build your business credit score
Personal and business loans will impact your credit. But only business loans will improve your business credit score.
Editor's pick: Business loans
Lendio is a marketplace that allows you to apply once and browse multiple business loans your small business could qualify for. It has few requirements and a network of over 75 lenders, making it one of the most reliable ways to find funding. But the interest rates you face could be high, and Lendio faced action from the FTC in 2020.
Pros- Large network of lenders
- Quick funding options
- Plenty of positive reviews
Cons- Government action in 2020
- Potentially high interest rates
| Loan amount | $500 – $5,000,000 |
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| APR | Starting at 6% |
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| Loan Term | 1 to 25 years |
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| Requirements | Operate business in US or Canada, have a business bank account, 560+ personal credit score |
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| Loan amount | $500 – $5,000,000 |
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| APR | Starting at 6% |
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| Min. Credit Score | 560 |
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When to consider a personal loan
Personal loans are good for startups and business owners who haven't quite reached lenders' minimum requirements.
Your business is new
With no business history established, new business owners frequently struggle to find loans. A personal loan is a good alternative because it relies on your personal credit score more than any other factor. And while you may not be able to cover all business purposes with a personal loan, you can certainly get started working toward financing some of the more common startup expenses.
You have excellent credit
If your personal credit score is close to perfect, a personal loan is hard to beat. Because lenders rely so heavily on credit scores and income to determine eligibility, you'll likely have access to much lower rates than with a short-term business loan, which is generally your only option when you're a startup.
You need to cover multiple business and personal expenses
A personal loan is flexible because of how you can use your funds. Since you can cover personal expenses and business expenses, you'll have more wiggle room to consolidate debt and get your idea off the ground.
You need quick funding
Personal loans are fast. They may take a few days to process, but most lenders are able to fund a loan within a week. This makes a personal loan the best choice if you need fast funding but don't want to — or can't qualify for — business lines of credit.
You've built your personal savings
Whether your business is just starting out or it's been going for a while and just doesn't have the strongest revenue, it might be better to rely on a personal loan if you have a decent cash flow outside your business or a hefty personal savings account. With the extra capital on hand, lenders may be willing to extend a larger loan or offer more favorable terms than they would to your business.
Editor's pick: Personal loans
LightStream personal loans
4.83 / 5
★★★★★
LightStream is frequently a top pick — and it deserves it. You won't find more competitive interest rates on a personal loan, and you could qualify for up to $100,000 for your small business. Just be prepared for a hard credit pull and stricter eligibility requirements than most other personal lenders.
Pros- Loans up to $100,000
- Multiple APR discounts available
- Extremely competitive rates
Cons- No preapproval process
- Good to excellent credit required
| Loan Amount | $5,000 – $100,000 |
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| APR | Competitive |
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| Interest Rate Type | Fixed |
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| Min. Credit Score | Good to excellent credit |
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| Turnaround Time | Varies |
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| APR | Competitive |
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| Min. Credit Score | Good to excellent credit |
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| Loan Amount | $5,000 – $100,000 |
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Business loan vs. personal loan: Other factors to consider
Before you start comparing lenders, here are a few final points you should consider.
- Business loans are held in a joint account with access for all partners. With the loan guaranteed by each partner, the risk placed on each individual is greatly reduced. Some personal loans accept coapplicants, but this is rare and may not be the right choice for larger partnerships.
- Loan terms are often longer and more flexible with business loans. This gives you more room to fit your monthly payments to your budget. But it also means you'll be stuck with extra interest if you aren't able to pay it off ahead of schedule.
- Taxes should also be considered. You can deduct the business expense the personal loan was used for, but the interest on the personal loan isn’t tax deductible.
