Business Loan vs. Personal Loan: What's the Difference?

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 have more freedom with how you use the funds, including for business purposes. Here's how to decide which is right for you.

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Key Differences Between Business Loans and Personal Loans

Minimum credit score for an SBA loan is reported according to SMB Compass, which works with small businesses.

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:

1. Determine how much you'll need to borrow.

2. Find lender options, such as banks, credit unions, online lenders and lenders offering loans through the SBA.

3. Gather your business financial information and documents.

4. 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, private lenders 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.

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.

How To Apply for a Personal Loan or a Business Loan

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

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.

Sources:

• SMB Compass. "Applying for an SBA Loan: Minimum Credit Score Requirements."

• FRED. "Finance Rate on Personal Loans at Commercial Banks, 24 Month Loan."

• SBA.gov. "Establish business credit."

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