Business Loans vs Personal Loans: Which is Right for You?

When deciding whether to use a business loan or a personal loan for financing, keep in mind that while personal loans can be used for business purposes, they often lack some of the benefits of a business loan.

By comparing loan terms, credit impacts, and personal liability issues. Business Loans Or maybe a personal loan is the best option for you and your business.

Business loan funds must be used for business purposes. Depending on the lender and the loan program, business loan funds can be used in a variety of ways.

• Expanding or acquiring an existing business.

• Buying real estate, building construction and renovation.

• Refinancing of other business debt.

• Purchasing equipment, machinery, furniture and other business assets.

• To be set aside as revolving or working capital.

Personal Loans Banks, credit unions and online lenders offer lines of credit to individuals, including business owners.

Lenders generally place few restrictions on what a personal loan can be used for. Unless a lender specifically excludes it, personal loan funds can generally be used for the same purposes as a business loan (including starting a business).

Choosing a personal loan over a business loan can make or break your results. As a general rule, it's best to keep your personal and business finances separate to protect your personal assets and credit. Before you blur the lines between the two, consider the following:

Personal loans are not linked to your business credit history, even if they are taken out for business purposes. Build business credit If you want to improve your chances of getting additional funding in the future, one of the best ways to do so is to choose a business loan instead of a personal loan.

Also, by opting for a personal loan, Business loans can affect your personal credit scoreLoan details will appear on your personal credit history, not your business credit history, and late or missed payments will typically have a negative impact on your personal credit score.

Personal liability isn’t always a consideration when deciding between a business loan and a personal loan. While a personal loan is your responsibility, you may also be personally liable for a business loan. Personal liability often comes down to: Business Structure Sole proprietors and general partners are generally personally liable for business debts. In contrast, when you structure your business as a corporation: Limited liability company An LLC or corporation can often provide protection for your personal assets.

moreover, Personal guaranteeIn many cases, a personal credit report is required to obtain a small business loan, meaning that you are personally responsible for the debt.

Finally, even if the funds from a personal loan are for business purposes, the debt will still appear on your personal credit report. Increasing your personal debt can work against you when applying for other personal loans. For example, the amount of debt listed on your personal credit report could affect your ability to obtain a personal mortgage.

Business loans can be difficult to obtain, especially for startups. Lenders often set eligibility requirements, such as how long you've been in business, annual revenue, and credit score. Business loans for startups And others often Online Money Lenderswhich have more flexible income and credit score requirements. However, these loans often have higher interest rates and shorter terms.

Qualifying for a personal loan can be easier in some cases. In addition to your credit score, personal loan lenders will look at your personal income and debt-to-income ratio. This can be helpful if your business is just starting out or isn't making a lot of revenue.

Comparing personal loan terms with business loan terms can help you determine which type of loan is right for your business. Here are some areas to look at:

Consider the loan amount offered. Business loans generally require: Larger loan amounts It's more expensive than a personal loan. For example, the maximum personal loan amount from online personal lender SoFi is $100,000. In comparison, JP Morgan Chase offers business term loans of up to $500,000, and the maximum loan amount for an SBA 7(a) loan, the Small Business Administration's main business loan program, is $5 million.

However, the loan amount only matters if the personal loan amount offered is significantly less than what your business actually needs.

In some circumstances, interest rates on personal loans can be higher than those on business loans, but the interest rate you receive will depend on several factors, including your credit score. Business Loan Calculator Estimate your monthly payments, total loan payments, and total interest paid to see if there are any significant interest rate differences between the loans offered.

Business loans can offer longer repayment terms than personal loans, depending on the lender. For example, the aforementioned Sofi personal loan and JP Morgan Chase business loan both have the same maximum repayment term of seven years. However, SBA 7(a) loans have a maximum repayment term of 25 years.

Keep in mind that the longer the repayment term of your loan, the more interest you pay over the life of your loan.

The repayment amount depends on the loan amount, the interest rate, and the loan term or repayment period. Comparing the repayment amounts of the personal loans and business loans offered will help you understand which one best suits your budget.

The application process for a personal loan is generally quicker than a business loan, though this may not be as clear if you use an online lender. Keep in mind, though, that a faster process may also mean higher interest rates and less favorable loan terms.

The time it takes to get a business loan depends on the type of loan and the lender. For example, SBA loans usually take 30 to 90 days to process. Bank business loans are faster, taking just a few weeks instead of months. Online lenders also usually have the shortest processing times, sometimes just a few days.

When comparing loan offers, be sure to ask each lender how quickly they will fund your loan. If it makes a difference in weeks rather than days, this can be a key factor in your decision.