The differences between a business loan vs personal loan are their rates, terms, and eligibility criteria:
- Business loans apply only to business expenses and require credentials based on business history.
- Personal loans are more flexible and generally are easier to qualify for because of being based on the borrower’s personal financial circumstances.
In the matter of obtaining capital, both a personal loan and business loan can provide financing opportunities for a business. Whether it be through a line of credit, a working capital loan, or other forms of startup financing, these loans can help your business grow and help you reach your goals.
To learn the differences and determine which option may be of more use to you and your business, consider the following.
Business Loan | Personal Loan | |
|---|---|---|
Maximum Loan Amount | Varies greatly; generally $5 million | Generally up to $100,000 |
Repayment Schedule | Monthly | Monthly |
Generally 1.25x | N/A | |
36% or less | 50% or less | |
Credit Score | Varies; usually 650-plus | Varies; usually 600-plus |
Collateral Requirement | Business assets, such as equipment, property, and inventory | Personal assets, such as property, vehicles, and accounts receivable (A/R) |
Time in Business | Generally 2-plus years | N/A |
Personal Guarantee Requirement | Varies; not standard | Yes |
Annual Revenue Requirement | Depends on lender and loan type | Varies; requires proof of personal income |
Disbursement Timeline | 30 to 45 days | 1 week to 30 days |
Business Loan Overview
Business loans are offered strictly for business purposes; loan proceeds must be put toward a business expense or opportunity. They’re granted to the borrower based upon the creditworthiness and history of a business and tend to have more rigorous qualification requirements for higher loan amounts and longer repayment terms.
There are various standards applicable to the type of loan offered, usually pertaining to time in business, DSCR, business credit score, and annual revenue requirements. Generally, a lender requires at least six months’ time in business, although the standard is typically two years. Typical DSCR requirements are 1.25x, although it depends on the lender.
As for business credit scores, these can vary depending on the business loan type being sought, but a good rule of thumb is 650 and above. Maximum loan amounts and required collateral can vary depending on the lender and loan type.
For established businesses, there are many business loan types available—whether it be a:
- Startup business loan
- Working capital loan
- Equipment loan
- Small Business Administration (SBA) loan
- Business line of credit
Business Loan Pros & Cons
| Pros | Cons |
|---|---|
| Helps establish your business credit | Has more rigorous qualification requirements and longer approval timeline |
| Can help finance large purchases for businesses with a limited budget | Can only be used strictly for business expenses |
| Comes with larger loan amounts and longer repayment terms | Has higher interest rates |
Who a Business Loan Is Right For
Business loans serve many purposes and are available to businesses across all industries. They may be beneficial to businesses:
- That need flexible access to capital: Businesses looking to grow their business further and that need funding can utilize a business loan to promote their business continually and pursue further opportunities.
- Looking to finance a long-term asset: For businesses that need to finance an expensive purchase, a business loan can help you obtain the asset and sustainably pay it off over time with monthly payments.
- With limited resources and that want to build business credit: While there are eligibility requirements attached to each loan, businesses with limited resources or history can use a business loan to establish creditworthiness, which can be used as leverage for favorable rates and terms later on.
How To Get a Business Loan
Application requirements will differ depending on the lender and your financing needs. Generally, however, it’s a straightforward process. When applying, reference our guide on how to get a small business loan to help you prepare.
Required documents include tax returns, balance sheets, and profit and loss (P&L) statements. Approval and disbursement typically take anywhere from 30 to 45 days, although it varies per lender.
There are many lenders that can facilitate a variety of business loans. Depending on your business needs, you can get a business loan from a local bank, online lender, or a credit union. Be sure to shop around for rates and terms to find one suitable for your budget.
Here are some resources to help you find a business loan provider:
Personal Loan Overview
Personal loans have limited restrictions as to how loan proceeds can be used, which is an ideal option for borrowers looking to utilize the funds in a variety of ways. They are especially beneficial for business owners who have limited or no business credit or history and want to use part of the loan proceeds to support their business.
In general, personal loans are typically easier to qualify for because approval is based on the personal credit history of the borrower. Factors such as personal credit score and DTI ratio are considered rather than DSCR or revenue requirements for a business.
Average credit score requirements for various personal loans generally start at 600 and above, with a DTI ratio of 50% or less. Of course, these criteria will vary depending on the lender, however, are less intensive overall.
Notably, personal loans have limited maximum loan amounts but make up for it with more favorable rates and terms. For borrowers who don’t need a large loan, a personal loan can help finance a variety of opportunities.
Personal Loan Pros & Cons
| Pros | Cons |
|---|---|
| Has eligibility criteria that is generally easier to qualify for | May have collateral that’s tied to your personal assets |
| Offers more favorable rates and terms in comparison to business loans | Has limited maximum loan amounts |
| Allows for funds to be used for both personal and business purposes | Won’t apply to building your business credit history |
Who a Personal Loan Is Right For
For borrowers considering a personal loan for business purposes, they may be applicable if you:
- Are ineligible for a traditional business loan: If you don’t meet the requirements needed for a business loan, personal loans are often easier to qualify for since they are based on the personal creditworthiness of the borrower.
- Seek flexible capital for various expenses: Personal loans have little to no restrictions as to how loan proceeds can be used, which is beneficial for a borrower who may need the funds for both personal and business purposes.
- Don’t need large loan amounts or long repayment periods: Since personal loans typically offer lesser loan amounts in comparison to business loans, they can be a more budget-friendly option for borrowers who need access to funds.
How To Get a Personal Loan
Personal loans are provided by a wide variety of lenders and can also be facilitated by a bank, credit union, or online lender. Each lender will have a different application, but the process is usually quite quick and simple.
It will require your personal financial statements and a few years’ worth of tax returns. Loan approval and disbursement have a quick turnaround time, usually within a few days. Do your research when comparing rates and terms with various lenders.
Frequently Asked Questions (FAQs)
Yes. If the lender you choose offers both loan products, you can utilize the same lender as long as you are approved.
No. Business loan proceeds are eligible to be used only for purchases applicable to the business. Personal loans, however, have more flexibility and can be used toward business expenses if necessary.
It depends on business needs and eligibility requirements. If you don’t qualify for a business loan, using personal money for business expenses is an option, alongside seeking investors or getting a personal loan.
Bottom Line
A personal loan and business loan both provide financing opportunities to grow your business. The differences between the two are their rates, terms, and eligibility criteria. When deciding which loan option may be best for your business, consider the eligibility requirements of each, and how they fit into your budget.
