Business Loan vs Personal Loan: Which is the Better Option for Your Business?
Loans are an excellent way of getting funds to help you in your quest to expand or enhance your business. You might think that since you are taking out a loan for your business that you are stuck with having to take out a business loan. Personal loans are also a popular choice for entrepreneurs who are looking to borrow to expand. But how will you know which option is right for you and your needs? We’ve laid out each choice’s pros and cons and a brief description to help you weigh your options.
Personal loans for business
Personal loans can be used for various purposes, from funding a trip or fixing your car to starting or financing your business. For the most part, personal loans are unsecured loans. This means that you do not need collateral to take out a loan.
Pros of taking out a personal loan for business
Flexibility
Personal loans are flexible because you don’t have to use them for just one thing. For example, you can take out a personal loan and use part of it to buy equipment for your business and interest for payroll.
Easier approval
Personal loans, in general, are easier to qualify for, especially if you have good credit. This is very helpful when you are just starting out and have not yet established your niche in the business world. In addition, approval for personal loans relies mainly on your credit score and income. So if you have more than one source of income, you can include them all in your application.
Faster funding
The release of funds is quicker for personal loans. You generally get your money within a week of approval. The waiting time is even less with online creditors whose release period is within a day or two of approval.
No collateral
Because most personal loans are unsecured, there is no need to put up collateral for your loan. Therefore, as long as you have a source of income and good credit scores, you will have a good chance of qualifying for a personal loan.
Cons of taking out a personal loan for business
Smaller loan amount
Personal loans usually are smaller than business loans. You can get an amount somewhere between $2,000 and $50,000. Depending on how much you need, this will be either just enough or too low to serve its purpose. If you are just starting out, $50,000 might be more than enough to address your needs. But if your business needs more than the maximum loanable amount for personal loans, you’ll need to look at other choices.
Short term repayment
Personal loans tend to have shorter repayment terms. They usually go from one to seven years. However, shorter repayment terms might not be something you can swing, especially when your business is just starting out.
Not tax-deductible
Interest incurred on a personal loan may not be tax-deductible. That is unless you can prove that all the loan proceeds were used for business purposes. This is because personal loans are not considered income for your business.
Effects on credit score
If you default on a personal loan used for business, your credit score will take a hit. This makes it harder for you to secure loans in the future. If you opted for a secured personal loan, you risk losing what you put up as collateral.
Business loans
Business loans, or small business loans, are loans that address your business needs. These loans can either be long-term or short-term. There are many different business loans available for any particular business need. However, unlike personal loans, business loans are only used for business purposes.
Pros of taking out business loans
Keeps your finances separate
Keeping your personal and business finances separate will keep things simple come tax season. It also ensures that whatever happens to your business will not affect your personal finances. In addition, there are benefits to business loans that personal loans do not have.
Business loans are tax-deductible
Because business loans can be considered income, the interest rates of business loans can be tax-deductible. This helps minimize your cash outflow.
Larger loan amounts
Business loans can range from $50,000 to $5,000,000. Some lenders might even offer more. This makes it a good choice for entrepreneurs who need more cash than what a personal loan can offer.
Lower interest rates, more extended repayment
Business loans generally have lower interest rates. Traditional lenders charge from 2% to 13% for business loans compared to 6% to 36% interest for personal loans. Business loans also have longer repayment terms. Depending on the business loan you applied for, the repayment terms could be between 10 to 25 years.
Cons of taking out business loans
Complex application compared to personal loans
The requirements for business loans are more extensive. You might need to provide at least two years of tax returns, various financial statements, and accounting documents. You might also need to do a presentation about your business and your business goals. You might not be approved if your company does not have a good enough credit history.
Lack of flexibility
Unlike personal loans, business loans are taken out for a particular purpose. Therefore, they should only be used for that one purpose you outlined during your application. You also agree to pay a set amount over a set amount of time. This might be a problem if your business earnings fluctuate significantly from one month to the next.
Collateral
Business loans are generally secured loans. This means you’ve put up collateral to secure your loan. You risk losing your collateral if you default on your business loan. Defaulting on your loan will also ruin your business credit score, making it difficult for you to secure business loans in the future.
Conclusion
Choosing which loan to apply for should be taken seriously. You need to weigh your needs versus how a loan addresses them. You also need to consider your business’ ability to repay that loan. Our expert lending team can guide you through this important part of your business decision-making process. Contact us today and our friendly staff will be happy to assist you.
