Some business owners face a dilemma between applying for personal loans or maybe applying for small business loans to boost their business. This article will explain the two, point out the differences between them, and help you make a good choice for yourself.
What is a personal loan and what is a business loan?
A personal loan is obtained for personal purposes like traveling, health emergencies, home renovation, home appliances, etc. The money is repaid in monthly installments with added interest.
A business loan is obtained for use in a business. Before approving the loan, typically, the lenders demand business collateral and other documentation and requirements. They can be, small business loans, term loans, invoice financing, etc.
What is the difference between them?
The most significant difference is that a personal loan is meant for personal purchases while the other one is strictly for a business.
Disadvantages of a personal loan over a business loan
A significant drawback of personal loans is that they come at higher interest rates than business types. Another disadvantage is that they are usually smaller in amount than business loans.
Advantages of a business loan over a personal loan
A business loan has more lenders than a personal loan.
You can obtain a business loan from commercial banks, the SBA (Small Business Administration), trade organizations, non-governmental organizations, etc. You have more choices.
A business loan offers additional benefits for a business than a personal loan.
When you obtain some of the small business loans for your business, some lenders will offer you business resources, additional toolkits, free mentorship, and other benefits that will make your business a success and increase the likelihood of repaying the debt. You won’t get these business benefits from a personal loan.
A business loan forces you to take your business finances, accounting, and record-keeping serious
If you haven’t taken your business finances seriously, a business loan will force you to do so. You will be asked about your cash flow, income, business assets, and other things. Obtaining this will force you to take your business finances and accounting very seriously.
A business loan makes you think about the long-term future of your business.
Before obtaining a business loan, lenders will often ask you various questions regarding the future of your business and your financial projections. These will make you think about your business prospects and other relevant details before obtaining them.
A small business loan helps you to build up your business credit
A business loan can help you build up your business credit, thus making it easier to borrow larger amounts of money in the future.
Disadvantages of a business loan over a personal loan
A business loan often requires more documentation
Often this kind of credit comes with stringent requirements and documentation needs than a personal one. You will contact to provide various things before it is given to you.
Can a personal loan be used for business purposes?
Yes, you can. You can use a personal loan to cover small business expenses like emergency payroll, monthly rent, and monthly payroll. But, you can only do so much. Your business will be better off with a business loan. A lot of lenders don’t mind if you use the personal one they give you for company. But some other lenders frown at this. You can ask the lender before you do this.
Can a business loan be used for personal purposes?
No, you can’t. Most lenders prohibit that.
When does it make sense to request a personal loan over a business one for a business?
Business loan lenders often ask for business credit history, tax returns, business plans, and other things that may be hard for some business owners to provide. On the other hand, personal loan lenders might only demand your personal credit history.Moreover, they do quick approvals, which is why they are often called fast loans.Just try to be as transparent as possible with your lender.
You can fund your business using a personal loan if you wish to do so. But a business loan would likely be better. Weigh your options carefully utilizing the advice in this article, discuss with your lenders, then make your final decision.