Business Loan vs. Personal Loan: What’s the Difference?
Written by
Sarah Silbert
Edited by
Melanie Grafil
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A business loan is a loan that must be used specifically for business purposes. A personal loan is different because it’s easier to qualify and you can use funds from the loan however you like, including for business purposes. Here’s how to decide which is right for you.
Key Differences Between Business Loans and Personal Loans
| Feature | Business Loan | Personal Loan |
|---|---|---|
| Funds received | – You can typically qualify for a larger sum | – Start at a few thousand and max out around $100K to $200K |
| Interest type | – Interest may be fixed or variable – Lower than personal loans – SBA loan may have maximum interest and cap the amount you pay to borrow money |
– Fixed or variable – Generally higher than business loan rates |
| Collateral required? | – Yes – Small Business Administration (SBA) loans under $25K don’t require collateral – Higher amounts generally require |
– No, with good credit – May be required with poor credit |
| Credit needed | – 670 or higher – 580 for an SBA loan – Lenders look at both personal and business credit score |
– 720 to 850 |
| Common use examples | – New business equipment – Hiring additional staff – Purchasing new real estate for operations – As long as the purchases support the business’ growth, use cases can vary |
– Consolidating existing debt – Paying for surprise medical bills – Financing weddings – Home renovations |
What Is a Business Loan?
A business loan is a loan specifically taken out by a business or an individual running a small business. With this type of loan, it’s understood that you’ll be using the funds specifically to grow the business — you can’t take out a business loan and suddenly decide to use the money to book a family vacation, for instance.
There are several types of business loans, but the most common include:
- Term business loans: These are paid back over a set period of time, similar to personal loans.
- SBA loans: SBA loans are offered and guaranteed through the US Small Business Administration.
- Other options: Business lines of credit, which function like a credit card, offering business credit up to a predetermined amount.
How To Get a Business Loan
To get a business loan, you’ll need to do the following:
- Determine how much you’ll need to borrow.
- Find lender options, such as banks, credit unions, online lenders and lenders offering loans through the SBA.
- Gather your business financial information and documents.
- Lenders will be looking at all of your business financials, including your business credit score, in addition to your personal credit score.
What Is a Personal Loan?
A personal loan is a loan offered by banks, credit unions and online lenders that you pay back over time. Compared to a business loan, personal loans are generally for smaller amounts of money, though they can still range as high as $100,000 to $200,000.
The credit score for your personal loan application will determine the interest rate you’re approved for, and can also impact the amount of money you’re able to borrow as well as the payoff terms.
Personal loans can be used in a variety of ways, such as to pay off unexpected expenses, to consolidate existing debt or to fund a wedding or vacation. You can also use a personal loan for business expenses, which could be an option if you aren’t able to qualify for a business loan on the strength of your business credit score and business revenue to date.
Did You Know?
According to the Federal Reserve Bank of St. Louis, the average interest rate on a 24-month personal loan is 11.66%. If you have an excellent credit score, you’ll qualify for the lowest rates.
Pros and Cons of Business Loans and Personal Loans
Business Loans Pros
- Large loan amounts
- Builds business credit
- Longer payoff terms
- Limited personal liability
- Your interest payments may be tax-deductible.
Business Loan Cons
- Can be difficult to qualify
- Funding can be slow
- Can only use funds for specified business purposes
Personal Loan Pros
- Funding is typically fast
- Available to a wide range of credit scores
- Can use funds for anything
Personal Loan Cons
- Can have high interest rates, depending on your credit score
- You’re personally liable for debt you can’t pay back
How To Choose the Right Option for You
If you’re deciding between a business loan and a personal loan to start a business, here’s a cheat sheet to find the right decision across various scenarios.
| If You… | Go With… |
|---|---|
| Don’t want business spending to impact your personal credit | Business loan |
| Might use the loan funds for a mix of personal and business expenses | Personal loan |
| Need more than $200,000 to fund your business | Business loan |
| Can’t meet business revenue or business credit score criteria | Personal loan |
| Need money quickly | Personal loan |
| Want to build your business credit | Business loan |
How To Apply for a Personal Loan or a Business Loan
| Category | Business Loans | Personal Loans |
|---|---|---|
| Credit score requirements | – Both personal and business credit scores are considered – Lower scores can reduce the amount you qualify for |
– Varies – Loans for bad credit are available |
| Documents needed | – Bank statements – Business tax returns – Business registration – Licenses or permits – Proof of collateral |
– ID – Address – Proof of income – Proof of employment – Social Security or ITIN number |
| Where to apply | Banks, credit unions, online lenders or through the SBA. | Banks, credit unions or online-only lenders. |
| How long it takes | – SBA loans: 5 to 10 days – Online lenders: possibly same or next day. Timing depends on loan complexity and application strength. |
Typically 3 to 5 days, but some online lenders offer same-day or next-day delivery. |
Tips for Getting Approved on Your Loan
Business Loans
Ideally, work to improve your credit if it needs repair before applying for a business loan.
If you already have a solid banking history with a given bank, it could make sense to start your search there to see if you qualify for the best interest rates. You can also consider applying with a co-signer or putting up collateral to strengthen your application if your credit and income don’t paint a strong enough picture.
Personal Loans
Before you apply for a personal loan, you should check your credit score and credit report to make sure there are no inaccuracies. Applying with a co-signer and putting up collateral are also options with personal loans.
FAQs about Business Loans and Personal Loans
Business loan or personal loan? There are pros and cons to each. Here are some frequently asked questions — and answers — to help you decide.- Which one is easier to get, a business loan or personal loan?
- A personal loan is easier to get than a business loan because business loans generally require a solid business credit score as well as a personal credit score, along with a strong application with business revenue that shows you can pay back the provided funds. Business loans are generally for larger amounts than personal loans, which is another reason why they can be more difficult to get.
- Which has lower interest rates?
- Business loans often have lower interest rates than personal, but the exact interest rate you qualify for will depend. The higher your credit score, the better the rate you will qualify for with either loan type.
- Can I use either for business expenses?
- You can use both a personal loan and a business loan for business expenses. You can use a personal loan for anything and you don't have to declare how the funds will be used, but when you get a business loan, you're agreeing to use the funds for business purposes only.
- How do they affect credit score?
- Business loans and personal loans both affect your credit. Personal loans only affect your personal credit score, while business loans can affect both personal and business credit. Making on-time payments will help build your credit, but going into debt or missing payments will hurt it.
- Can I switch from one to the other later?
- You can choose to get a business loan or a personal loan and decide to switch options, or vice versa. But keep in mind that you'll be applying for a separate loan when you decide to switch, and there's no guarantee you'll be approved, especially if you're applying for a business loan but you don't have a strong application, including a solid credit score and sufficient business revenue or a co-signer.
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