Whether you’re an entrepreneur with a great idea but lacking the necessary capital to get your business off the ground or you want to fund the growth of your existing business, you may be looking to acquire capital.
In that case, you may want to consider applying for a business or personal loan. But first, you’ll need to know what type of loans might be available to you, and the benefits and potential drawbacks of each type of loan.
Throughout this article, we’ll explain the pros and cons of each to help you decide which loans could help the growth of your business.
» MORE: Different types of loans
Personal loans explained
This is a type of loan available to individuals, usually as a fixed amount, borrowed at a fixed rate over a set period of time.
Personal loans are often lent as unsecured loans. With an unsecured loan, you borrow a sum of money from a lender, with the promise to pay it back over an agreed set time period in fixed monthly repayments.
Unsecured loans are so named because they are not secured against any asset you own – this is the main difference between unsecured and secured loans. It is also why personal loans often offer a lesser sum than when applying for a secured loan.
» MORE: What is an unsecured loan?
Advantages and disadvantages of personal loans
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Can I use a personal loan for business?
Although personal loan implies personal individual use, in some cases they can be used to fund a business.
Some lenders will allow you to use a personal loan for business purposes, usually for more indirect needs. But remember they will base your affordability on your personal finances, not of your business.
However, the majority of lenders separate their loan products into business loans and personal loans. Each type carries different interest rates and eligibility criteria.
When applying to a personal lending provider for a business loan keep in mind that they will require the details of how you intend to spend a loan. If your business reason does not fall into their lending criteria then you will not be eligible, so make sure you check first.
» MORE: Business funding options
Advantages and disadvantages of using a personal loan for business
Personal loans can be used to fund a business, but what are the arguments for and against using a personal loan to inject capital into your business?
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What can a personal loan be used for?
A personal loan can be used for pretty much any significant purchase, as personal loans usually range from £1,000 to £25,000, and sometimes can go up to £50,000.
Whether you plan to renovate your home, fund a wedding or inject capital into your business, a personal loan can come in useful.
Personal loans are popular because their interest rates are usually lower than you would pay on credit cards. However, this is not always the case. Always check the comparative interest rates between lenders and all the finance options at your disposal before committing pen to paper.
Personal loan vs business loan rates
Personal loan interest rates are usually higher than business loan rates. One of the reasons is because of the different application processes involved.
Although it depends on the lender, a personal loan can take a matter of hours or days to be approved. Lenders tend to charge individuals with a personal loan at higher rates than business loans, to help mitigate risk.
Business loans may be seen as less risky for lenders because of the information typically revealed by the application and eligibility process, which means lenders are more confident that businesses can pay back the entirety of the loan. Therefore, business loan interest rates can be lower.
Business loans explained
Business loans are a potential route to capital for growing businesses. They can be either secured or unsecured, depending on the circ*mstances of your business, especially whether you have assets like physical premises.
Business loans often start from £1,000, and can sometimes run into the millions.
What can business loans be used for?
Businesses usually use these loans as liquid funds to purchase supplies, inventory, equipment and machinery.
Businesses often pay for expenses like these using credit cards, but there are many instances when business loans are a viable and preferable alternative to credit cards.
Business loan vs mortgage
Traditional business loans are not typically used to purchase property. For this purpose, you’ll need to apply for a commercial mortgage.
This type of loan is normally used to pay the mortgage on your office space or other business premises. However, you may also be able to raise finances for your business through a commercial remortgage.
What you need to be accepted for a business loan
There are several criteria you need to pass, and information you will need to supply, in order to qualify for a business loan:
- Healthy turnover and profit, indicating the ability to keep up with repayments
- Appropriate loan amount compared to turnover
- Trading history records
- Credit and payment history
- Business accounts history
- Proof your business is UK-based
- Most business loan products will only lend to businesses that have been trading for at least two years
Advantages and disadvantages of business loans
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How to choose between a business loan or a personal loan
As you can tell, choosing between a business loan and a personal loan is not clear cut. However, the choice becomes simpler when analysing the circ*mstances of your business.
Firstly, consider the size of your business and your trading history. How much growth are you trying to drive? Knowing this will determine whether the smaller sums provided by a personal loan will be sufficient, or whether you should apply for a business loan to receive more capital.
Another point to review is whether a secured loan is an option for your business. The benefit of a secured loan is the ability to access larger amounts of funding and having a longer time period to pay it back. With a secured business loan, you may be able to get a significantly higher cash injection than with an unsecured personal loan.
Ultimately, when choosing between a business loan and a personal loan, it will depend on your business’s individual circ*mstances.Taking a look at our personal loan and business loan comparison tables is a great way to compare the benefits of various loans, and find the ideal loan for your business.
About the Authors
Peter Adams
Peter reports on a number of areas in the personal finance sector, with a particular interest in supporting businesses and individuals in the UK services industry.
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Connor Campbell
Connor is a lead writer and spokesperson for NerdWallet. Previously at Spreadex, his market commentary has been quoted in the likes of the BBC, The Guardian, Evening Standard, Reuters and…
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