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

Business Loan vs. Personal Loan: How to Choose the Best Option; When funding your small business, there are many loan options available to you. Learn about business loans vs. personal loans and how to decide which is best for you.
Lauren Ward

Lauren Ward

Updated June 22, 2021
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Editor’s note: At Lantern, we strive to help you make financial decisions with confidence. To do this, we occasionally feature content that includes information about our partners and their products or services. We do not provide, endorse, or guarantee any third-party product, service, information or recommendations—and our opinions are our own.
Whether you’re financing a startup or need some extra capital for your existing business, there are many 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.

Using a Personal Loan for Business

Most personal loans have very few restrictions on what the funds can be used for. That makes them a viable option to help jump-start your business, unless the lender explicitly states that the money can’t be used for that purpose. A personal business loan may come with a smaller loan limit than standard business loans. Most personal lenders don’t offer loans over $50,000, and you’ll probably need excellent credit and financials in order to qualify for that amount.Personal loan rates are also usually higher compared to business loans, since they’re usually unsecured. However, a personal loan does tend to have a more competitive rate than do credit cards. The repayment terms typically range between one and five years. The total time frame usually depends on how much you borrow and 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.

Personal Business Loan Application Process

While online business lenders often offer a streamlined application process, typically most personal loan applications tend to be less intense than most small business loan options, regardless. You can usually get a loan quote with just a soft pull on your credit score. That means that in just a few minutes you can see how large a loan you could qualify for, rates, repayment terms, and monthly payment amounts. In some cases, you may be able to compare multiple loan structures and pick which one you prefer. 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 for short. You might not qualify for as much money if you already have a lot of debt compared to your monthly pay. The maximum DTI varies by lender, but usually your DTI needs to stay under 43%. That means all of your monthly debt payments (including the new personal loan) must be below 43% of your monthly income. 

Pros and Cons of Using a Personal Loan for Business

You’ve got a lot to consider when you’re contemplating getting a personal loan to use for business purposes.

Pros of Using a Personal Loan for Business

There are a number of potential advantages to getting a personal loan to use for business. These can include the following.
  • Easy application process, especially online
  • Typically fast funding time (potentially, your funds could be deposited within a day when you opt for an online lender)
  • Frequently unsecured, so you don't put your personal (or business) assets at risk
  • Usually have a fixed rate, so monthly payments are predictable 

Cons of Using a Personal Loan for Business

Of course, there are drawbacks to consider as well.
  • Amounts are usually lower than business loans
  • Won’t do anything to build your business credit score 
  • Can put your personal credit score at risk (if your business fails and you default on the loan)
  • No business loan interest tax write-off

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, if you’re wondering how SBA loans work, you’ll discover that the popular SBA 7(a) program allows for loans up to $5 million. Online business lenders may offer loans up to $500,000 to $1 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, bear in mind that especially if your business is new or has poor credit, lenders may also look at your personal credit.They may also have a minimum period of time that they require your company to have been in business. A more established business is more likely to qualify for funding than a startup. 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. And if you qualify and accept the loan terms, your funds can be deposited quickly. Plus, many online business lenders list their minimum eligibility criteria on their websites so you can focus on the ones you’re likely to get approved for. These requirements 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. No matter what you choose, tips for applying for a small business loan include understanding eligibility requirements and comparing lenders. 

Pros and Cons of Business Loans

When you’re trying to decide if a business loan might be right for your financing needs, there’s a lot to think about. Consider the following.

Pros of Using a Business Loan

  • Potentially lower interest rates 
  • Loan amounts tend to be larger
  • Longer repayment periods are typically available 
  • Potential to build your business’s credit if you make your payments on time
  • 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. These may include the following.
  • 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 a Personal Loan vs. a Business Loan

How do you decide between using a personal loan and 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. Next, take a look at your personal loan qualifications versus your business loan qualifications. If you have excellent credit and not a lot of debt, a personal loan could be a good option. But 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 to get a sense of how lenders might see it by reviewing how long you’ve been in operation and what your revenue and DTI are. If your company is newer or 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. And if you need a large sum, for a real estate purchase, for instance, a business loan is likely a better option than a personal loan, since you can usually get more funding. You’ll likely be able to spread payments out over a longer term, too, which may make the loan more affordable for you from month to month.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 Credit helps you find and compare small business loans options from multiple lenders or personal loan options from multiple lenders. That way, you’ll have a good sense of what’s available to you and be able to make a confident, informed decision.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans)The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC21024

About the Author

Lauren Ward

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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