Business Loans Vs. Personal Loans: Which Is Right for You?
How to compare your loan options to make the best choice for your company
When you’re trying to get funding for your business and researching business loan options, the long list of qualifications can seem daunting—especially when you discover that it can take weeks or even months for a lender to approve your application. The perceived difficulty in getting a business loan leads many entrepreneurs to consider taking out a personal loan to fund their enterprise instead.
While the consensus is that business loans are more challenging to get than personal loans, there are other factors to consider before you borrow money in your name to launch or grow your company. In most cases, if you qualify for a personal loan, you can also get a business loan, which may take less time than expected.
The difference between business and personal loans
The difference between business and personal loans is simple: One is issued to a business, while the other is designed for individuals. However, there are other significant differences to consider if you borrow money to cover business expenses.
Loan purpose
Personal loans can be used for any purpose, including non-business needs. As long as you can prove to the lender that you can repay what you borrow, the lender doesn’t restrict how you spend the money.
On the other hand, business loans are designated for business use only and for specific purposes. You can borrow money for working capital, equipment, real estate, or other expenses; some loans are only for designated expenses and cannot be used for anything else.
Repayment terms
Business loans typically offer longer repayment terms; some SBA loans, for example, allow you up to 25 years to repay the loan. On the other hand, personal loans typically max out the repayment period at 10 years; most require full repayment in three to five years. This can substantially increase the monthly payments and make them unaffordable.
Lending limits
Personal loans typically limit the amount you can borrow to 100,000 or less from one lender. If you need more money, a business loan is a better choice. For instance, SBA 7(a) loans allow you to borrow up to $500,000.
Collateral
Personal loans have the advantage when it comes to collateral since most lenders don’t require you to put up property as collateral. Business loans typically require collateral to reduce the lender’s risk of losses if you default.
Tax advantages
In some cases, you can deduct the interest you pay on a business loan from your taxes. Personal loans don’t offer any tax advantages.
When you look at these differences, it becomes clear that the ease of getting a loan isn’t the only thing to consider when comparing your business funding options. A personal loan might be “easier” to get in terms of qualifications and how long it takes to get the money, but that doesn’t always mean it’s the best choice.
Why do business loans seem harder to get than personal loans?
There’s no doubt that business loans have stricter qualifying criteria than personal loans. Still, as mentioned above, if a lender approves you for a personal loan, you can likely get a business loan too, assuming you have the required time in business and collateral needed to qualify.
Getting any loan requires a good credit score (typically 700 or higher) and firm financial footing. It’s not just your credit score that lenders consider, though.
They also look at:
Cash flow
You must prove that you have enough money to pay your expenses, including repaying the loan, and have money left over.
Debt
If your company already has a lot of debt, getting a loan will be significantly harder. Lenders will look at your debt-to-income ratio (DTI); generally, a DTI of 36% or less is preferred, but some lenders will accept up to 43%.
Time in business
Most lenders want borrowers to have a few years in business to demonstrate cash flow and that they’re secure enough to repay the loan.
Your business plan
Business lenders won’t even consider an application without a detailed business plan.
Your industry
Certain industries are riskier than others when it comes to lending money, and in some cases, the type of business you operate will make it challenging to secure a business loan.
Getting a personal loan is much easier because the lender only looks at your credit report and financial statements to determine whether you can repay the loan. The business loan application requires substantially more paperwork and evidence that your company can afford to borrow money. Applying for a business loan typically also means submitting the following:
- A detailed business plan or executive summary detailing how you plan to use the money
- Revenue projections
- Cash flow reports
- Profit and loss statements
- Business licenses, articles of incorporation, or other business establishing the legitimacy of the operation
- Bank statements
- Personal financial documents
- Details about collateral
- Personal and business tax returns
- List of accounts receivable
- Details about business debts
- Personal background information (education, background check, previous names/addresses, etc.)
Providing this information isn’t typically an issue for a well-established business operated by an individual with solid credit. However, if your credit has some blemishes, you’ve been in business for less than three years, or you need money for a startup, providing the documentation for a traditional loan can be challenging. Lenders also take time to examine your finances and determine whether you qualify; it can take up to 90 days to get approval for some SBA loans, for example.
That said, changes within the lending industry are making it easier for businesses to get business loans without jumping through as many hoops or waiting months. Online lenders often have less stringent criteria and can approve applications in a matter of days. Working with one of these lenders can streamline the process and help you access money with more favorable terms than a personal loan.
Ultimately, the fact that business lenders require so much more information and examine your company’s financial situation with a fine-tooth comb creates the perception that these loans are much harder to get than personal loans. The truth, though, is that going through the business loan process may be more beneficial to your company in the long run.
Comparing your loan options
Don’t automatically assume that because business loans can be harder to get, your only option is a personal loan. Before applying for any type of financing, compare your options, looking at:
- The kind of loan; different loan programs fulfill different needs
- The lender requirements in terms of credit score, time in business, type of business, minimum income, etc.
- The interest rate and repayment terms
- Requirements for collateral, personal guarantees, and down payments
When you look at loan products from various lenders, you’ll most likely find one that meets your needs and makes it possible to borrow the cash you need with reasonable terms.
Keep in mind that when you take out a personal loan, you aren’t building credit for your business. Paying back what you owe on time will strengthen your personal credit, but if you want to establish a positive history for your company, a business loan is a better choice.
It’s also essential to consider timeframes when applying for a business loan. Some lenders offer shortened processing times, but you should start the application process well before you need the funds. That said, you may be able to access emergency funding through business lending programs, like SBA Express loans or a business line of credit.
Grow your business with easy funding solutions from Finance Factory
At Finance Factory, we want to help small businesses succeed and offer various funding solutions to help you get your company off the ground or keep it moving forward. We make it easy for entrepreneurs to connect with lenders for SBA loans, personal loans, and more, removing the guesswork and streamlining the process so you can spend less time managing the loan process and more time doing what you do best.
If you have a credit score of 700 or better, fill out our simple prequalification form and one of our specialists will help you find the perfect program for your situation. Pre-qualifying won’t affect your credit, so take the first step today and see how easy it is to get the money you need to reach your business goals.
