Business Vs. Personal Loan: Everything You Need To Know (2024)

Whether you should choose a business or personal loan depends mainly on your situation and needs. If you are starting up a new business, a personal loan may be easier to qualify for as you get your venture off the ground; however, not every personal loan lender lets you use funds for business-related expenses. On the other hand, a business loan may be best for established businesses that need money to purchase equipment or otherwise fund operations.

What Is a Business Loan?

A business loan is a financial product specifically designed to finance the operation or expansion of a business. Business owners can use this type of financing for many different purposes, including capital investments, operational expenses and working capital needs. Small business loans typically come with longer repayment terms than personal loans, and many require some form of collateral and a personal guarantee from the business owner.

How Do Business Loans Work?

Business loans are typically offered by banks, credit unions and other financial institutions. Some online lenders also specialize in lending to businesses and may impose more accessible qualification requirements than traditional competitors.

Lenders base a large portion of the approval process on the business’s financials, including revenue and outstanding debts. Applicants may also have to describe the purpose of the loan funds—something not usually required for personal loans.

Once approved, the lender disburses the loan proceeds as a lump sum, and interest begins to accrue on the entire outstanding amount. Funding speeds vary, but money may be available as soon as the next business day after approval and verification. Borrowers must typically make monthly payments, though some business financing may require more frequent payments.

Some essential business loan details include:

• Qualification requirements. Lenders want applicants to have a dependable source of income and a detailed business plan that outlines a growth strategy. They also look at factors like the business’s or owner’s credit score, which should be at least 680 to qualify with a traditional lender. Most lenders also impose minimum time in business and minimum revenue requirements—usually between six months and two years and from $100,000 to $250,000, respectively.
• Collateral. Depending on the lender and loan terms, it may be necessary to provide some form of collateral, such as the business’s equipment or inventory. Many business lenders also require business owners to guarantee their loans personally.
• Loans amounts. Business loan amounts vary by lender and loan type. In general, though, loans are available from around $1,000 to $5 million or more. These borrowing limits are substantially higher than those for personal loans. They are most helpful for business owners who need to cover major purchases or ongoing expenses.
• Repayment terms. Because loan amounts are often high, business loan repayment terms usually range from three to 10 years but may be as long as 25. This means that monthly payment amounts may be lower than personal loans. Still, interest accrues over a longer period, resulting in a higher cost of borrowing over the life of the loan.
• Interest rates and fees. Business loan annual percentage rates (APRs) usually range between 6% and 30% or more, plus various fees. Standard lender fees vary but may cover origination, processing, underwriting and application costs.

What Is a Personal Loan?

A personal loan is an unsecured loan that borrowers can use to cover various costs and expenses—everything from medical bills and home improvements to weddings and vacations and sometimes including business expenses.

Banks, credit unions and online lenders offer personal loans and do not require collateral. These loans are often easier to obtain than traditional business loans because credit score requirements may be flexible and no business history is required. However, not all personal loan lenders let you use personal loan funds for business purposes, so confirm with the lender before applying.

How Do Personal Loans Work?

Personal loans are available from many lenders, including online lenders that offer accessible qualification criteria. Depending on the financial institution, borrowers may be able to apply in person, over the phone or entirely online.

To get a personal loan, borrowers must provide basic information about their identity and income, but the application process is usually less rigorous than for business loans. For this reason, approval is often faster, and some borrowers may receive almost instant approval.

Funds are disbursed in a lump sum and may be available as soon as the same day the borrower is verified. Loans are repaid on a monthly basis, with interest accruing on the entire balance. As with business loans, longer repayment terms result in lower payments but come with a higher overall cost due to accumulated interest over time.

Some essential personal loan details include:

• Qualification requirements. Borrowers should have a score of at least 560 to qualify for a personal loan—though more creditworthy borrowers get access to more competitive terms. Some online lenders specialize in borrowers with limited credit history. Lenders also may consider the prospective borrower’s income, debt-to-income (DTI) ratio and employment history. Other factors like residence status, age and ability to provide collateral may be considered.
• Collateral. Personal loans are most commonly unsecured, so there is no collateral requirement. However, some lenders may require a co-signer or guarantor if the borrower’s credit score is too low. Likewise, some lenders offer secured options with higher loan amounts.
• Loans amounts. Personal loan amounts vary by lender and range from a few hundred dollars up to $100,000. The loan amount the borrower qualifies for depends mainly on their needs and creditworthiness.
• Repayment terms. Repayment terms for personal loans typically span from one to seven years with fixed interest rates. The longer the repayment term, the lower the monthly payments but the higher the overall cost due to additional interest charges.
• Interest rates and fees. Interest rates for personal loans usually start around 3% for the most qualified borrowers and can extend up to around 36%. The interest rate a borrower qualifies for depends on their credit score, as well as the lender, loan amount and repayment term. Fees may also apply, including origination fees of around 1% to 8% of the loan amount.

Pros and Cons of Business Loans

Pros

• Flexible loan uses: Borrowers can use business loans for capital investments, operational expenses, working capital needs and other business costs.
• High borrowing limits: Borrowers can often access larger amounts of capital than a personal loan would offer, with loan amounts extending from around $1,000 to $5 million or more.
• Lengthy repayment terms: Loans typically come with longer repayment terms than consumer loans, making them easier to manage. Borrowers generally must repay business loans over three to 10 years, with terms sometimes extending up to 25 years.
• Competitive interest rates: Business loans often come with competitive interest rates compared to other financing types—anywhere from 6% to 30%. That said, lower rates usually come with collateral requirements, making it difficult to qualify for a loan, especially for new businesses with limited assets.
• Robust customer support: Business loans typically come with dedicated customer service teams with experience dealing with small business owners. Using a personal loan for business purposes means borrowers are less likely to get tools and support tailored to small business owners.

Cons

• Rigorous qualification requirements: Banks and other traditional lenders often have strict loan approval requirements. This includes personal and business credit scores and business financials. Many lenders also impose minimum revenue and time-in-business requirements.
• Collateral requirements: Lenders often require some form of collateral to secure a loan. This can make it difficult to obtain financing for new business owners without substantial assets.
• High interest rates: Business loans without collateral requirements may have higher interest rates than those secured with a business’s assets.
• May require a personal guarantee: Some lenders may require a personal guarantee from the business owner, which makes them personally responsible for repaying the loan if the business cannot. That said, all personal loans require a personal guarantee.
• Slow funding speeds: Business loans tend to take longer to process than personal loans, meaning it can take several weeks for the funds to be released. Still, some lenders promise same- or next-day funding for business loans.

Pros and Cons of Personal Loans

Pros

• Flexible uses: Borrowers can use personal loans to cover a variety of expenses, including medical bills, home improvements, vacations, weddings and unexpected expenses. That said, some lenders may not offer personal loans for business use.
• Fast funding speeds: Personal loans can be approved and funded quickly—often as soon as the same day.
• Accessible qualifications: Personal loans usually have more accessible qualifications than business loans. Moreover, applicants need not provide the extensive financial documentation required for business loans.
• No collateral requirement: Unlike business loans, personal loans do not require any form of collateral. This makes them a popular option for borrowers without substantial assets.
• Competitive interest rates: Depending on the lender and borrower’s credit score, personal loan rates can vary from as low as 3% to upwards of 36%. Ultimately, interest rates and fees depend on factors like the loan size and borrower creditworthiness.

Cons

• Abbreviated repayment terms: Unlike business loans, personal loans come with shorter repayment terms—usually between one and seven years. This results in higher monthly payments and can make them more difficult to manage.
• Limited funds available: Most personal loans have a maximum amount of around $50,000 but may go up to $100,000, depending on the lender. Still, these amounts are lower than for business loans and can make it difficult for some borrowers to access the funds they need.
• Interest rates may be high: High-risk borrowers may be subject to higher interest rates on personal loans. Additionally, some lenders may charge origination and application fees, which can further increase the cost of borrowing.

Can You Use a Personal Loan for Business?

It is possible to use a personal loan for business purposes. However, it is not usually recommended as the terms and conditions of personal loans are typically not well-suited to businesses. Personal loans also have shorter repayment periods and higher interest rates than traditional business loans, which can make them less desirable. What’s more, some lenders do not permit borrowers to use personal loan proceeds to cover business expenses.

That said, most lenders don’t require borrowers to provide collateral for personal loans—something often required for business loans. Business loans also typically involve more stringent qualifying criteria than personal loans, as most lenders prefer working with established businesses with strong cash flow.

Ultimately, when deciding whether to use a business loan or a personal loan, evaluate your individual needs and situation before making a decision.