Business loan vs. personal loan – how are these different?

A business loan is a loan that can only be used specifically for business purposes. The funds you borrow can be used to start, expand your business, buy equipment or support other financial needs. These loans can be either secured or unsecured loans and offer the option of either a fixed or variable interest rate.

There are multiple types of business loans available, such as:

• Term loans
• Line of credit
• Merchant cash advance
• Equipment finance
• Commercial mortgage
• Chattel mortgage
• Invoice financing

A personal loan is when you borrow a fixed amount and repay it over a specified period whilst being charged interest on the amount you borrowed. You can either have a secured loan that requires an asset to be used as collateral or an unsecured loan with no collateral. Typically you’ll find that unsecured personal loans have higher interest rates than secured personal loans. Some examples of assets that would be required for a secured personal loan include a car or property. The main benefit of a personal loan is that there is no limitation on what you can use the money for.

Although a personal loan and business loan can be used to help you financially support your business, there are some key differences. You should properly assess these differences when deciding the best option for you and your business.

Application process

There is a big difference in the application process between a personal loan vs a business loan. The application process for a personal loan is quick and simple and usually just based on your personal finances and credit score. With a business loan, lenders will require detailed business plans and financial projections when applying for a business loan. This can make the application process for business loans longer and more cumbersome.

The amount you can borrow

Another major difference will be the amount you’re able to borrow. Lenders will approve an amount for a business loan based on the future prospects of your company. This may allow you to borrow a higher amount than a personal loan. The amount you can borrow for a personal loan will depend on whether you choose secured or unsecured and how healthy your overall finances are.

Loan flexibility

There is a lot more flexibility with personal loans when compared to business loans. There are often no restrictions on what you can use the borrowed money for., which means you can use it for any purpose, including funding things for your business. On the other hand, business loans can only be used for business purposes, such as purchasing equipment, property or other business expenses.

Building credit history

When you take out a personal loan, you’re building your own personal credit history, and if you make your payments on time, it helps improve your credit score. Whereas with a business loan, you’re building your business's credit history. Having a good personal credit history can help you in the future when you want to take out a home loan or other credit products. And building up a positive credit history for your business will have the same impact on your business. So if you want to take out a mortgage as your business, having the history will help.

If your company is established with substantial revenue history that can be shown to a lender, a business loan may suit you better. However, if you’re just starting your business, a personal loan based on your personal credit history may be your only option.

Having collateral that can be used to secure the loan can help you get a more competitive interest rate on a business loan or a secured personal loan. You’d be smart to compare personal loan and business loan rates before making your final decision.

Another thing to consider when choosing between a personal loan or business loan is that you’re often offered lower loan amounts with personal loans. If what you need the loan for is more expensive, you may need to go with a business loan.

Taking out a business or personal loan will impact your business and personal credit history, respectively. If you choose a personal loan and make your repayments on time, you’ll be building up your personal credit history and credit score. Whereas if you already have a good personal credit history and want to build up your businesses, you’re better to choose a business loan.

The final decision of whether a business loan or personal loan is better for helping you finance your business comes down to your personal and business circumstances. Ensure you consider your situation and needs, research and make an informed decision that provides the greatest support for your goals. If you’re unsure how best to proceed, you can always seek the advice of a financial advisor specialising in business finances to help you.