Whether you should get a business loan or a personal loan mostly depends on your needs and situation. If you are starting a new business, it may be easier to get a personal loan while you get things going.
However, not all personal loan lenders will let you use the money for business costs. On the other hand, a business loan might be best for businesses that are already up and running but need money to buy equipment or pay for other business expenses.
What Is a Business Loan?
A business loan is a type of loan that is specifically made to help a business keep running or grow. This type of financing can be used for a lot of different things, such as capital investments, operational costs, and working capital needs.
Small business loans usually have longer terms for paying them back than personal loans, and many of them require collateral and a personal guarantee from the owner of the business.
How Do Business Loans Work?
Most banks, credit unions, and other financial institutions give out business loans. Some online lenders focus on lending to businesses, and their requirements may be easier to meet than those of their traditional competitors.
A big part of a lender’s decision to give a loan is based on the business’s finances, such as its income and debts. Applicants may also have to explain what the money will be used for, which isn’t usually required for personal loans.
Once the loan is approved, the lender gives the money all at once, and interest starts to be added to the whole amount. Funding times vary, but after approval and verification, money may be available as soon as the next business day.
Borrowers usually have to make payments once a month, but some business loans may require payments more often.
The following are some important business loan details:
- Qualification requirements. Lenders want people who want to borrow money to have a steady source of income and a detailed business plan that shows how the business will grow. Traditional lenders also look at things like the business’s or owner’s credit score, which needs to be at least 680 to qualify. Most lenders also have minimum requirements for how long the business has been open and how much it makes, which are usually between six months and two years and $100,000 to $250,000, respectively.
- Collateral. Depending on the lender and the terms of the loan, you may need to put up some kind of collateral, like the business’s equipment or inventory. A lot of business lenders also want the business owners to personally back their loans.
- Loans amounts. Loan types and lenders determine how much a business can borrow. Most loans, on the other hand, range from about $1,000 to $5 million or more. These limits on how much you can borrow are much higher than those for personal loans. They are best for business owners who need to pay for big purchases or costs that keep coming up.
- Repayment terms. Business loan repayment terms are usually between three and ten years, but they can be as long as 25 years if the loan amount is big. This means that the amount you have to pay back each month may be less than with a personal loan. Still, interest builds up over a longer time, so the cost of borrowing is higher in the long run.
- Interest rates and fees. The annual percentage rates (APRs) on business loans usually range from 6% to 30% or more, plus other fees. Standard lender fees can be different, but they may include costs for starting, processing, underwriting, and applying.
What Is a Personal Loan?
A personal loan is an unsecured loan that can be used to pay for a wide range of costs and expenses, such as medical bills, home repairs, weddings, vacations, and sometimes even business costs. Personal loans are available from banks, credit unions, and online lenders, and they don’t need to be backed by anything.
Most of the time, these loans are easier to get than traditional business loans because you don’t need a business history or a good credit score. But not all lenders of personal loans will let you use the money for business, so check with the lender before you apply.
How Do Personal Loans Work?
There are many places to get personal loans, including online lenders with easy-to-understand requirements. Depending on the bank, borrowers may be able to fill out an application in person, over the phone, or completely online.
Borrowers must give basic information about who they are and how much money they make to get a personal loan, but the application process is usually less strict than for business loans. Because of this, approval is usually faster, and some borrowers may get approval almost right away.
The money is given out all at once, and the borrower may be able to get it as soon as the same day the loan is approved. Loans are paid back every month, and interest is added to the whole balance. As with business loans, longer payment terms mean lower monthly payments, but the total cost is higher because interest adds up over time.
The following are some important personal loan details:
- Qualification requirements. Borrowers need a credit score of at least 560 to qualify for a personal loan, but those with better credit get better terms. Some online lenders focus on people with little credit history. Lenders may also look at the potential borrower’s income, debt-to-income (DTI) ratio, and employment history. Other things, like where you live, how old you are, and your ability to put up collateral, may also be taken into account.
- Collateral. Most personal loans are unsecured, so no collateral is needed. However, some lenders may need a co-signer or guarantor if the borrower’s credit score is too low. In the same way, some lenders offer secured options with higher loan amounts.
- Loan amounts Personal loan amounts vary by lender and can range from a few hundred dollars to $100,000. How much of a loan a borrower can get depends mostly on what they need and how good their credit is.
- Repayment terms. Personal loans usually have fixed interest rates and terms that range from one to seven years for paying them back. The monthly payments are lower when the loan is paid off over a longer period of time, but the overall cost goes up because more interest is charged.
- Interest rates and fees. Interest rates on personal loans usually start around 3% for the best-qualified borrowers and can go up to around 36%. The interest rate a borrower gets depends on their credit score, as well as the lender, loan amount, and length of time to pay back the loan. There may also be fees, such as origination fees of about 1% to 8% of the loan amount.
How Can You Use a Personal Loan for Business?
A personal loan can be used for business purposes. But it’s usually not a good idea because the terms and conditions of personal loans aren’t usually good for businesses.
Personal loans also have shorter payback periods and higher interest rates than traditional business loans, which can make them less desirable. Also, some lenders don’t let borrowers use the money from personal loans to pay for business costs.
Still, most lenders don’t ask borrowers for personal loans to put up collateral, which is often required for business loans. Personal loans are usually easier to get than business loans because most lenders prefer to work with businesses that have been around for a while and have a steady cash flow.
In the end, you should think about your own needs and situation before deciding whether to get a business loan or a personal loan.
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