There’s a range of financing options available for small businesses. Find out if yours is more suited for a business loan or personal loan.
You may be looking for a loan for your business for many reasons. A sudden spike in sales might have created a need for some additional cash flow, or maybe that influx has created the need to expand. While a tailored business loan would seem to be the obvious choice, many smaller businesses still choose personal loans, favoring its simplicity and ease of applying. Here we consider the pros and cons of both.
OnDeck Small Business Loans
Among the largest online business lenders offering term loans and lines of credit at competitive fixed rates.
- Minimum Amount: $5,000
- Maximum Amount: $500,000
- Loan Term: 3 to 36 months
- Simple online application process with fast decisions
- Dedicated loan specialists and loyalty benefits
- Must have been in business for at least one year with annual revenue of $100,000+
- Must have a personal credit score of 500+
What do you want to read about first?
Main differences between business loans and personal loans
|Business loans||Personal loans|
|APR||How business lenders charge for their loans can vary widely. Some offer interest rates as low as 5.5%. Keep in mind that some lenders charge monthly fees rather than traditional loan interest rates.||Both fixed and variable interest rates can be offered. Some lenders offer starting APR’s as low as 3.99%, or even lower for secured loans.|
|Terms||Both short term and long term financing options are available. You could get financing for as short as a month with invoice financing or get funds to be paid back within 25 years with SBA loans.||Repayment periods are usually between 1 and 7 years.|
|Loan Amount||Maximums can be as high as $5 million.||Maximums can be as high as $100,000.|
|Eligibility||Your business finances are usually weighed more heavily than your personal finances. Typically requires you to have been in business for at least one year and have monthly revenue of at least $10,000.||Typically requires good to excellent credit. Lenders may also evaluate other financial factors such as your income and debt-to-income ratio.|
|Ease of application||You’ll likely have to submit a business plan and your accounting numbers with your application. Some lenders, mostly traditional banks, may require you to apply for a business loan in person.||Applications can usually be completed online in just a few minutes, with some lenders offering pre-approval.|
|Restrictions on use||Can be used for a wide variety of business purposes including financing equipment purchases, payroll, buying a vehicle and much more.||There are many general purpose personal loans that can be used for just about any legitimate reason. You can also apply for specifically purposed loans for things like purchasing a car or refinancing student loans.|
Which is easier to apply for, a business loan or a personal loan?
- Business loan. Most banks want to see detailed projections, business plans and assurances that your company will be in a position to make repayments for the whole loan period. However, many online business lenders require fewer details to approve a business loan. You’ll find these lenders may approve you after simply seeing your business’s accounting information or financials as well as your own personal information.
- Personal loan. You can apply for a personal loan in just a few minutes. The fate of your application for a personal loan will be predominantly decided by your credit and your own personal financial situation. You’ll also need proof of income, and if you are self-employed you will likely need the last two years of tax returns.
Which offers better value for my business?
- Business loan. For business taxes, there are significant benefits to keeping your personal and business affairs separate including easier filing come tax season and interest deductions. You could borrow well over $1 million with a business loan.
- Personal loan. Personal loans can come with a range of money-saving perks, including no prepayment penalties and autopay discounts. The most you can borrow with a personal loan is up to $100,000, with most lenders offering lower maximum amounts. If your businesses requires more financing, it could be cumbersome to take out multiple personal loans from different lenders.
What if I have business partners?If you opt for a business loan, the loan will be held in a joint account with easy access for all partners. With the loan guaranteed by each partner, the risk placed on each individual is greatly reduced. If you decide to apply for a personal loan, lack of joint access to your company’s loan may affect the efficiency of your company, or create issues of responsibility if the business is unable to meet repayments. However, there is the option of taking out a joint application personal loan. These loans usually have a maximum of two applicants, although some may allow more.
Compare your options for business loans and personal loans
Do business loans or personal loans offer better flexibility?
- Lenders are likely to enforce strict limits in the first 12 months of your loan, but if you can back up your initial projections you could well be granted an increase in your funding amount.
- You will need to use the entire loan amount for business purposes.
- It’s possible to borrow more funds from a lender, but you may have to have paid a certain amount of your existing loan first.
- Funds can be used for business purposes as well as for other personal needs.
Should I get a secured or unsecured loan?
- Business loan. Deciding between a secured or unsecured business loan will often depend largely on the amount of money required. Many lenders require newer business owners to provide collateral for loans, or only offer unsecured lines of credit. However, there are now a number of online lenders offering unsecured loans. Keep in mind that these unsecured loans can come with higher rates, so if you do you have collateral to offer, you may want to consider applying for a smaller loan or comparing other financing options that don’t require collateral.
- Personal loan. Similar to business loans, secured personal loans tend to come with lower rates. However, if the business fails and you’re unable to make repayments, the lender can take possession of your collateral.
What can I use a personal loan for?
A personal loan can be used for a number of expenses, from consolidating debt to financing a wedding to paying for a big home improvement project. Many lenders offer amounts as low as $1,000 to $10,000, and you can find options as high as $100,000.
In order to qualify for the highest loan amounts at the lowest interest rates, you’ll need to have an excellent credit score and a regular source of income that shows you have an ability to handle the monthly payments.
Can I use a personal loan for business expenses?
Yes. You can use a personal loan to cover a business expense, but you should understand the risk: if you default, the bank or financial company you borrow from may seize your personal assets rather than the assets of your business.
However, if you’re just getting started on your business, a personal loan may be easier to qualify for than a business loan. This is because you’ll be using your credit rather than the credit of your business, and you can start on the road to financing your business venture even if you don’t currently have capital or collateral to secure a business loan.
What can I use a business loan for?
A business loan is meant to finance a business expense. Because this category is so broad, it can pretty much be used for anything that relates to your business. There are loans meant for specific purposes, like getting an advance on your invoices or buying equipment, but there are also term loans that are given as a lump sum and can be used for whatever your business needs.
Many banks or financial companies will want you to have a plan in place that details how you’re going to use the loan, and your approval will be based on both your personal credit and your business’s income and age.
Can I use a business loan for personal expenses?
It depends on the personal expense you’re planning on using the loan for, but in general, it’s not recommended. Accountants and lawyers both recommend that you keep your business finances and personal finances separate to make it easier for you to track expenses and inform the IRS of your different streams of revenue.
In addition, your business loan contract may specify a specific use for your loan funds. If this is the case, using your loan funds for any other purpose, even if it’s related to your business, might constitute a breach in contract that could default your loan.
Should I take out a business loan or a personal loan?
- Your business has an established financial history
- You need to fund a specific business expense or take out an advance on an invoice
- You want to build a relationship with your bank or financial company
- You have collateral from your business to use for the loan
- Your business is new and hasn’t built credit
- You’re comfortable risking your personal finances for your business
- You have excellent credit and can get a lower rate with a personal loan
- You need to cover both personal and business expenses
Other factors to consider
- Sole proprietor or partnership? There are reasons why a business loan would most likely be better suited to a company run by partners. However, a sole proprietor may appreciate the control they have over a personal loan, which will likely involve a smaller sum of money.
- The length of the loan. For a shorter period, the lower rates of a personal loan might hold more appeal. However, over an extended period, for example, 10 years, this advantage might be overshadowed by the ease of use offered by a business loan.
- The age of the company. One of the most common issues with a business loan is getting access to it in the first place. If your business is less than a year old, you could compare startup loans or consider personal loans for business use.
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