Compared to personal loans, business loans offer a wider variety of loan types, higher loan amounts, more competitive rates and longer terms. But to qualify, you’ll likely need to be in business for at least a year or two with regular monthly revenue.
Personal loans like Upstart are generally easier to qualify for, especially if you have good personal credit and regular income. But borrowing amounts are limited, generally capping out $100,000 with shorter repayment terms of one to 12 years.
Here’s a breakdown of the main differences between business and personal loans, so you can make the right choice for your business.
Business loans vs. personal loans
Here’s a quick overview of the differences between business and personal loans.
| Business loans | Personal loans | |
|---|---|---|
| APR | Start around 5.5% | Start around 6% |
| Terms | 18 months to 25 years | 1 to 12 years |
| Loan amounts | Up to $5 million | Up to $100,000 |
| Eligibility | 1 year in business, $10,000 or more in monthly revenue | Good to excellent credit, regular source of income, low debt-to-income (DTI) ratio |
Business loan vs. personal loan: 4 main differences
Here are four factors to consider when choosing between a business loan or a personal loan.
1. Business loans typically offer better value
Business loans tend to offer better rates and terms than personal loans. And they have more flexible funding options – like lines of credit, merchant cash advances and accounts receivable financing.
You may be able to borrow more with a business loan while building a relationship with a lender — two things that could drive the growth of your business in the long run.
2. Business loans offer more flexibility
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.
Personal loans can also be used for almost any purpose, but some lenders won’t let you borrow if your loan will be used for business purposes. But if they do, understand the risk: A bank, credit union or online lender can seize your personal assets if you default.
3. Business loans may be harder to qualify for
With a business loan, most lenders want to see detailed revenue projections and a business plan. And they only work with businesses that meet their minimum revenue and time in business requirements. However, you can potentially borrow a lot more with a business loan.
Because personal loan approval relies mostly on your credit score and income, the application process tends to be simpler and faster. A self-employed business owner will likely be asked to provide two years of tax returns as proof of income.
4. Personal loans are unsecured — business loans may not be
Personal and business loans both offer unsecured options, but personal loans are typically unsecured. On the other hand, business loans may be secured or unsecured – but you may have to provide personal guarantee with either type.
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 loans overview
Lendio business loans
4.8
★★★★★
Finder score
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.
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Pros
- Large network of lenders
- Quick funding options
- Plenty of positive reviews
Cons
- Government action in 2020
- Potentially high interest rates
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Loan amount $1,000 – $5,000,000 APR Starting at 3% Min. Credit Score 500 Loan term 3 months to 25 years Requirements Operate business in US or Canada for 6 months or more, have a business bank account, minimum 500 personal credit score, around $8,000 in monthly revenue
| Loan amount | $1,000 – $5,000,000 |
|---|---|
| APR | Starting at 3% |
| Min. Credit Score | 500 |
When to consider a business loan
Choosing to get a business loan may be a better choice if the following factors are true.
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 can even consolidate business debt with a business debt consolidation loan.
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.
Personal loans overview
LightStream personal loans
4.8
★★★★★
Finder score
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.
- Available in all states
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Pros
- Loans up to $100,000
- Multiple APR discounts available
- Extremely competitive rates
Cons
- No preapproval process
- Good to excellent credit required
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Loan amount $5,000 to $100,000 APR 7.49% to 25.49% Interest Rate Type Fixed Min. credit score Good to excellent credit Turnaround Time As soon as same day Loan Term 24 to 144 months
*Payment example: Monthly payments for a $10,000 loan at 5.95% APR with a term of 3 years would result in 36 monthly payments of $303.99. Truist Bank is an Equal Housing Lender. © 2020 Truist Financial Corporation. SunTrust, Truist, LightStream, the LightStream logo, and the SunTrust logo are service marks of Truist Financial Corporation. All other trademarks are the property of their respective owners. Lending services provided by Truist Bank.
| Min. credit score | Good to excellent credit |
|---|---|
| APR | 7.49% to 25.49% |
| Loan amount | $5,000 to $100,000 |
When to consider a personal loan
A personal loan may be a better choice if the following factors apply.
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.
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.
