- Limit your personal liability: If the business loan doesn’t require a personal guarantee, then you won’t be on the hook for making payments in the event of loan default.
- Build personal and business credit: Making on-time payments may help you build both business and personal credit, which may help you qualify for other financing options and higher loan limits down the road.
- Higher loan amounts: You can typically access much more capital compared to a personal loan, with amounts ranging from around $1,000 to $5 million or more.
- Lower interest rates: While loan terms are based on several factors, business loan rates are generally lower than personal loan rates. As of late 2023, the median business loan rate is 7% compared to the national average personal loan rate of 12.17%.
AP Buyline’s content is created independently of The Associated Press newsroom. Our evaluations and opinions are not influenced by our advertising relationships, but we might earn commissions from our partners’ links in this content. Learn more about our policies and terms here.
Updated February 26, 2024
In a nutshell
Whether you’re launching a new business, or you’re looking to expand an established venture, you might need help with funding.
- Personal loans and business loans can both provide access to capital, but there are benefits and drawbacks to each approach.
- Generally, a personal loan may be best for newer businesses that don’t need tons of funding, while business loans may be a good fit for more established companies.
How does a business loan work?
A small business loan provides funding that’s exclusively used for business expenses — anything from office supplies to commercial real estate.
Business loans are usually crafted for a specific business purpose, so you’ll notice several types of financing as you do your research. Some common options include term loans, revolving lines of credit, equipment financing, invoice factoring, commercial real estate mortgages, and loan options from the Small Business Administration (SBA).
To apply for one of these financing options, you can go to a traditional bank, credit union, or an online lender. You’ll typically need to submit documents — such as financial statements and business tax returns — to support your loan application. The lender may pull your personal credit and business credit and ask for details about your company, like your annual revenue and time in business. If you qualify, you may need to provide a personal guarantee that says you agree to be personally responsible for the debts if the loan goes into default.
Every loan or line of credit may come with different interest rates, eligibility requirements, and term lengths. For instance, invoice factoring loans are repaid within weeks and may not include a credit check, while some SBA loans come with terms of up to 25 years and usually require strong credit. Business loan amounts can vary as well, from as little as $1,000 to as much as $5 million.
How does a personal loan work?
A personal loan is money you can borrow to pay for just about anything, so there are far fewer restrictions. However, some lenders won’t allow you to use the funds for business expenses.
If you find a bank, credit union, or online lender that offers personal loans for business use, the application process is typically simple. The lender will review your application, pull your credit and check your income. They won’t check your business credit and may require less documentation compared to a business loan. But virtually all personal loans require a personal guarantee.
Personal loan amounts usually range from $1,000 to $50,000 or more, and terms usually range from two to seven years. Many lenders require strong credit to qualify for the loan instead of putting up collateral.
Business loan vs. personal loan
Business loans and personal loans can help fund your new business venture, but they each come with their own pros and cons.
Business loan pros and cons
Pros:
Cons:
- Potentially difficult to qualify for: Lenders often require that you have good credit, strong finances, and at least two years in business to qualify for a business loan. Business owners who don’t meet these requirements will need to look elsewhere for funding.
- May require collateral: Depending on the lender, you may need to provide some form of collateral to secure the loan. A new business that doesn’t have many assets yet may have difficulty with this requirement.
- May require a personal guarantee: Many business loans require a personal guarantee from the business owner, which can put the owner’s personal assets at risk.
Personal loan pros and cons
Pros:
- Easier to obtain: Personal loans generally come with more accessible qualification requirements and fewer documentation requirements.
- Usually unsecured: Most personal loans don’t require collateral to secure the debt, making them popular among business owners without substantial assets.
- Helps build personal credit: Taking out debt in your name can help you build healthy personal credit, as long as you make payments on time.
- Competitive interest rates: Borrowers with excellent credit and strong income may qualify for low-interest rates to help cut the costs of borrowing.
Cons:
- Won’t build business credit: Using a personal loan for business expenses won’t do anything to help you build business credit, even if you make payments on time.
- Smaller loan amounts: Many personal loans max out at $50,000 (though some extend to $100,000 depending on the lender). Either way, it’s much less than what you can borrow with some business loans, which can make it harder for some business owners to get the capital they need.
- Shorter repayment terms: Personal loans are usually repaid within two to seven years, which results in higher monthly payments that can make the debt more difficult to manage.
When should you get a business loan or a personal loan?
When comparing business loans and personal loans, it’s important to consider your needs and what your business might qualify for. Here are some guidelines on how to choose your financing:
When to use a business loan
- You want to establish or build your business credit.
- You need to borrow more than $100,000.
- You’re confident you’ll meet lender requirements for the loan.
- You don’t want to take on personal responsibility for the business’s debt.
When to use a personal loan for business
- You have strong personal credit and qualify for good loan terms.
- Your business is on the newer side, and you don’t yet qualify for a business loan.
- You don’t have collateral to secure the loan.
Alternatives to business and personal loans
Business and personal loans aren’t your only financing options. If you’re unsure which is best for you, consider these alternatives:
- Personal savings: Funding your business with savings can help you avoid paying interest and taking on debt. Newer businesses are more likely than established companies to use personal savings rather than take out bank loans, according to a Federal Reserve report.
- Grants: Business grants don’t have to be repaid, but they’re typically geared toward specific groups, such as women, minorities and business owners in low-income areas. And the business usually needs to be operating for at least six months to qualify. You can check out Grants.gov or your nearest Small Business Development Center for leads.
- Business credit cards: Getting a business credit card can help you cover business expenses while building credit and potentially earning rewards. And if you pay off the balance in full each statement cycle, you’ll avoid paying interest.
Frequently asked questions (FAQs)
Are business loans cheaper?
Business loans generally come with lower interest rates compared to personal loans, so they may be a cheaper option. But loan terms depend on your financial profile, so you’ll need to shop around and compare options. The cheapest way to fund a business is by using personal savings — if possible.
Do business loans hurt your credit?
If you provide a personal guarantee when getting the business loan, it can impact your personal credit in a few ways. Lenders typically pull your personal credit when reviewing your loan application, and the hard inquiry may temporarily lower your credit score by a few points. Your score may drop a bit further because you’re taking on debt. Over time, making on-time payments on the business loan can help boost your credit score. But the opposite is true, too: Missing payments could result in a hit to your credit.
Can you use a personal loan for business?
Yes, some lenders allow borrowers to use personal loans for business expenses.
Can a personal loan affect a business loan?
A personal loan won’t impact your business credit, but it could affect your ability to qualify for a business loan later on.
AP Buyline’s content is created independently of The Associated Press newsroom. Our evaluations and opinions are not influenced by our advertising relationships, but we might earn commissions from our partners’ links in this content. Learn more about our policies and terms here.