Business owners who need financing may wonder whether they are better off getting a personal loan or a business loan. The truth is, there isn’t a simple answer to the business loan vs personal loan conundrum. Both can be used to fund small business needs, though there are reasons why you may want to choose one over the other.
How Business Loans and Personal Loans Differ
The biggest difference when evaluating business loans vs personal loans is how the lender determines qualifications. Business loans are approved based on both your business and personal credit. Lenders set time-in-business and minimum business revenue requirements that you must meet to qualify.
Personal loan qualifications are based on your personal credit history, your personal debts, and your personal income—which may also include any income attributable to you from your business. While personal loan funds can be used for business expenses, business loans cannot be used for personal expenses.
When to Use a Personal Loan
If you are a startup business, your financing options are often quite limited. As such, you’ll likely need to use a personal loan for business startup financing. While this may seem counterintuitive—because you want to develop your business credit—many lenders require you to have been in business for a defined period of time and be producing significant revenues before they will lend to you.
Personal loans allow you the flexibility of using the funds to cover your personal expenses as well as business expenses. This may be helpful if you are relying solely on the revenue generated by your business for your personal income. If business revenue is insufficient, you can use personal loan funds to pay your household expenses. We strongly recommend you keep your business and personal finances separate.
When to Use a Business Loan
Business loans are a great financing option if you have an established business that can meet the lender’s minimum qualification requirements. Utilizing a business loan will help build your business’s credit history, making it easier for your business to qualify for future financing.
When financing with a business loan, the loan proceeds must be used only to pay for business expenses. As such, you cannot use funds from the business loan to pay a personal obligation. If you need to cover personal expenses unrelated to your business, you would be better served by a personal loan.
There are a variety of business loan options available, each of which can meet the different needs of a small business. When selecting a business loan to apply for, review the qualification requirements as well as the intended uses to decide which business loan—or loan type—would best fit the needs of your company.
Getting Approved: Business Loans vs Personal Loans
When comparing business loans vs personal loans, one of the most obvious differences you will find are the qualification requirements. This also may be the largest deciding factor when you are selecting which type of financing is right for your business. Small businesses that are well established will be better suited for a business loan while the only option for a startup business may be a personal loan.
Personal Loan Qualification Requirements
Approval for personal loans is generally based on:
- Personal credit score: Most lenders require a credit score of at least 600
- Annual income: While lenders don’t often specify the amount of annual income you need to qualify, they will consider your income as part of your debt-to-income ratio
- Debt-to-income ratio: This is the amount of monthly debt you have—including payment on the new loan—compared to your monthly income; most lenders look for a debt-to-income ratio of 43% or less
Business Loan Qualification Requirements
Approval for business loans is generally based on:
- Personal credit score: While some lenders accept credit scores of as low as 550, most will require a credit score of 600 or greater
- Time in business: Time in business requirements vary by lender and the type of business loan for which you are applying
- Annual revenues: To qualify for most short-term business loans you will need to have annual business revenues of at least $50,000
- Personal guarantee: Despite being a business loan, many lenders require that business owners provide a personal guarantee on the loan. In the event your business is unable to repay, you are personally liable for the debt.
Business Loans vs Personal Loans: Rates & Terms
Evaluating rates and terms of business loans vs personal loans can be a challenge. In general, business loans are going to have slightly higher interest rates but may offer larger loan amounts. When it comes to repayment terms, the term of a business loan will vary greatly depending on the type of business loan you are applying for. Personal loan repayment terms vary based on the lender you choose to work with.
Maximum Loan Amounts
$500,000 (up to $5 million for SBA loans)
3 months to 3 years (greater for SBA loans and those secured by real estate)
1 to 12 years (greater for loans secured by real estate)
Interest Rates (APR)
8% to 150%
5% to 36%
Pros and Cons of Personal Loans vs Business Loans
There are pros and cons to both business loans and personal loans. Determining which financing option is best for you will depend on how well qualified you are for each loan type, and what your specific financing needs are. Before deciding on a personal loan vs a business loan, take the time to weigh the pros and cons of each method of financing.
Pros of Personal Loans
- Qualifying is easier: Personal loan qualification is based on your personal credit score and your personal income, which may make it easier to qualify for than a business loan. This is especially true for businesses in the early startup phases.
- Interest rates are generally lower: If you have a great credit score and substantial income, you may qualify for a lower interest rate on a personal loan than you can get on a small business loan.
- Collateral may not be required: With an unsecured personal loan, the loan is truly unsecured. There is no collateral, and there is no Uniform Commercial Code (UCC) filing against your assets.
Cons of Personal Loans
- Maximum loan amounts are typically lower: Generally, personal loans, especially unsecured loans, offer lower lending amounts than many small business loans.
- You won’t build business credit: By taking a personal loan to fund your business needs, you won’t be building any business credit history.
- Your repayment term may be too short: Aside from home equity loans and home equity lines of credit, the maximum repayment term for a personal loan rarely exceeds seven years. If you need to borrow a substantial amount of money and need a longer repayment term, a small business loan through the Small Business Administration (SBA) may be a better option.
Pros of Business Loans
- You can establish business credit: Unlike a personal loan, a business loan is issued with your business as the borrower. This allows you to build your business’s credit profile.
- Loan amounts are often higher than personal loans: While it is possible to get personal loans in amounts up to $100,000, most personal loan lenders have a maximum loan amount of $50,000. Business loans are available in much greater amounts.
- Repayment terms may be longer: Well-qualified businesses that can obtain a term loan through a traditional lender, or an SBA loan, can often get longer repayment terms than they would be eligible for with a personal loan.
Cons of Business Loans
- There are time-in-business requirements: Startup business owners often have difficulty obtaining business loans due to the minimum time-in-business requirements
- Your business needs to be producing sufficient revenue: Even if you can meet the time-in-business requirements, you still need to meet the annual revenue requirements. Many lenders require that your business is grossing more than $50,000 to $100,000 annually.
- You may be personally liable anyway: While qualification for the loan is based on the performance of your business, most lenders will still require that you provide a personal guarantee for the loan. This means in the event your business is unable to make payments, you become personally liable for the debt.
When it comes to deciding between a personal loan vs a business loan, the decision is often made for you. Startup businesses—those with less than six months of business operations or less than $50,000 in gross annual revenues—are often not eligible for business loans. However, for businesses that do meet the thresholds for small business financing, the decision should be based on your intended use of the loan proceeds, and which financing product will offer the greatest advantages to your business.