Business Loan vs. Personal Loan: How to Choose the Best Option

Lauren WardUpdated August 11, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

Whether you’re financing a startup or need some extra capital for your existing business, there are many business financing options to explore. Your first inclination may be to apply for a business loan, but it’s also possible to obtain a personal loan for business use. The best type of financing for your company depends on a number of factors, including your business type, the amount you want to borrow, and the financial history of both your business and yourself.Compare a business loan vs. a personal loan to find the structure and terms that will suit your needs and help you achieve your goals.

Business Loan vs. Personal Loan: Main Differences

Understanding some of the basic differences between business loans and personal loans can be helpful as you make your choice.

	Business Loan	Personal Loan
Interest Rates	6% to 25%	Starting at 7.95%
Loan Amounts	Up to $5 million	Up to $100,000
Loan Terms	Up to 25 years	1-7 years
Eligibility Requirements	Typically require details of business finances, financial ratios, minimum time in business, minimum revenues, and/or good credit history	Typically not rigorous as long as your credit rating is high

Using a Personal Loan for Business

Most personal loans have very few restrictions on what the funds can be used for, making them a viable option to help jump-start your business.A personal business loan may come with a smaller loan limit than standard business loans. Most personal lenders don’t offer loans over $100,000, and you’ll probably need excellent credit and financials in order to qualify for that amount.Personal loans interest rates are also usually higher compared to business loans. However, a personal loan does tend to have a more competitive rate than credit cards. The repayment terms typically range between one and seven years, depending on whether you prefer smaller monthly payments or paying less interest in the long run.Once you take out a personal loan, you’ll receive a lump sum deposited into your personal account. Even though the money doesn’t go into a company account, it’s still important to track your spending as part of the business so your accounting will be accurate.Recommended: Guide to Personal Loan Qualifications

Personal Business Loan Application Process

While online business lenders often offer a streamlined application process, most personal loan applications tend to be less intense. You can usually get a loan quote with just a soft pull on your credit, meaning you can see loan amounts, rates, and terms all without it affecting your credit score. If the terms are agreeable to you, you can then submit a full application. That usually involves uploading documents like a copy of your ID, pay stubs, and tax returns. Personal lenders also evaluate your income and existing debt to determine how much you can borrow. This is called your debt-to-income ratio, or DTI. The maximum DTI varies by lender, but usually your DTI needs to stay under 36%. That means all of your monthly debt payments (including the new personal loan) must be below 36% of your gross monthly income.

Pros and Cons of Using a Personal Loan for Business

If you’re deciding whether or not to use a personal loan for your business, take the following pros and cons into consideration.

Pros of Using a Personal Loan for Business

There are a number of potential advantages to getting a personal loan for business use, including:

Easy application process, especially online
Typically fast funding time (as quick as one day)
Frequently unsecured, so you don't put your personal (or business) assets at risk
Usually have a fixed rate, making monthly payments predictable

Cons of Using a Personal Loan for Business

Of course, there are drawbacks to consider as well, including:

Amounts are usually lower than business loans
Won’t build your business credit score
Can put your personal credit score at risk (if your business fails and you default on the loan)

Recommended: What Are Common Small Business Loan Terms?

Using a Business Loan

There are many types of small business loans available, giving you multiple opportunities to find the right type of financing for your company. For example, you might consider:

Typically, the loan amounts can be much higher than those you’ll find with personal loans. For instance, the popular SBA 7(a) program allows for loans up to $5 million. Online business lenders may offer loans up to $2 million.Instead of looking at your income as a personal lender would, business lenders typically evaluate your company financials, including cash flow and revenue, to determine how much you can borrow. However, if your business is new or has poor credit, lenders may also look at your personal credit score.Business lenders may also have a minimum period of time that they require your company to have been in business, with more established businesses being more likely to qualify for funding than startups. Business loans usually require some type of collateral, whether it’s pledged business assets, a personal guarantee, or a combination of both. If the loan is secured in one of these ways, you may qualify for lower interest rates.

Business Loan Application Process

The business loan application process varies depending on the type of loan you want to get. Traditional banks and SBA lenders usually have more intensive application processes, involving in-depth reviews of your financials, business plan, and projections. It can take weeks or even months before you receive a decision.Alternatively, online business lenders offer a much faster approval process. If you qualify and accept the loan terms, your funds can be deposited quickly. Requirements for online business loans typically include revenue minimums, a minimum credit score, and a minimum time in business. The application process is often easier with an online lender, as well. Often, you can simply link your accounting software and bank accounts for the lender to confirm your revenue and other financial details. Recommended: How to Apply for Small Business Loans

Pros and Cons of Business Loans

When you’re trying to decide if a business loan might be right for your financing needs, consider the following pros and cons.

Pros of Using a Business Loan

Advantages of using a business loan over a personal loan include:

Potentially lower interest rates
Loan amounts tend to be larger
Longer repayment periods are typically available
Potential to build your business’s credit
Simplified accounting, since funds won’t be deposited into your personal account
Possibility of deducting interest on your taxes

Cons to Using a Business Loan

There are also downsides to using a business loan, including:

Collateral and/or a personal guarantee is usually required
Typically not designed to fund startups, since there are often requirements for length of time in business and established business credit
Frequent payments may be required, as often as weekly or bi-weekly

How to Pick Between a Personal Loan vs. a Business Loan

How do you decide between using a personal loan or business loan for your company? Begin by considering how much money you want to borrow. Since personal loans typically offer less, this is a good starting point to determine which route to explore first. If you need a large sum, a business loan is likely a better option than a personal loan, since you can usually get more funding. Next, take a look at personal loan qualifications versus business loan qualifications. If you have excellent credit and little debt, a personal loan could be a good option. However, you’ll have a harder time qualifying (and getting competitive rates) if your credit is below average and you already have high credit balances compared to your income. Evaluate your business from a financial perspective by reviewing how long you’ve been in operation and what your revenue and DTI are. If your company is newer and doesn’t meet the revenue requirements or if your DTI is greater than 45%, you’re more likely to need a personal loan to get funding. Once you’ve assessed all these factors, you should have a clearer sense of what’s going to be the most appropriate choice for you and your business.

The Takeaway

Whether you end up deciding that a personal loan or a small business loan is better for you, it’s helpful to be able to compare your options.Lantern by SoFi helps you find and compare small business loans options from multiple lenders with just one application and no obligation to you.

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About the Author

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.

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