Business Loan vs Personal Loan
Summary
Business loan vs personal loan — what’s the difference? Learn how each loan works, the key differences and how to choose the right one for your needs and budget.
In this article:
Whether you’re starting a new small business, transforming your part-time project into a full-time venture or in search of some fast funding, you may be looking for a loan. Navigating between small business loans and personal loans may be confusing since they have some similarities and some key differences. If you’re trying to figure out which loan is the best fit for your needs, keep reading to get some additional information to help make the right decision for your goals.
What is a business loan?
A typical business loan is an installment loan — a lump sum you repay over time in fixed monthly payments — designed specifically for business purposes.1 Business loans help business owners and companies cover a range of expenses such as office equipment, rental space, and marketing efforts.
Getting a business loan typically requires that you show the potential lender a business plan, proof of revenue (like your business bank statements), your credit history and a business license. You’ll also need to provide the business’s articles of incorporation or other documentation depending on what type of entity the business is, such as a sole proprietorship or partnership.
If you’re looking to start or expand your business, a business loan might be the right type of funding to support your next steps.
How much can you borrow with a business loan?
The amount of money you can borrow varies greatly. Business loans typically have higher borrowing limits than personal loans, and the interest rates differ based on your business’s creditworthiness. In some cases, the prospective lender may review your personal credit as well as the credit history of other key people participating in the business.
Lenders usually look at several factors to decide how much you can qualify for including:
Revenue
Lenders typically offer loans based on a percentage of your yearly revenue, usually between 10% and 30%.2 For example, if your business earns $100,000 annually, the lender may offer you a loan ranging from $10,000 to $30,000.
Time in business
Lenders usually prefer to lend to businesses that have been running for at least six months to two years,3 because it shows stability. New businesses generally have fewer financing options, but some online lenders and the Small Business Administration (SBA) may extend business loans to startups.4
Credit scores
Lenders may check both your personal credit score and your business credit score.
Your personal credit score is based on your own history of managing debts, like credit cards and loans. Like a personal credit score, a business credit score is a number that helps potential lenders estimate your business’s creditworthiness.
There are multiple business credit scoring agencies, each with its own model. Some factors that may influence your business’s credit score include your company’s payment history on business loans and credit cards, the riskiness of your industry and the size of your company.5
If you don’t yet have a business credit score, lenders may rely on your personal score to determine the loan offers you qualify for.
The stronger your credit scores, the more money you may be able to borrow and the lower the interest rate could be.
Debt load and financial obligations
Lenders generally ask for a list of debts and financial obligations before extending a business loan. They’ll look at other loans you have as well as business credit cards, lines of credit and regular expenses, like bills and payroll.6 Lenders want to get an idea of how much of your revenue goes toward repaying your existing debts to help them determine if you can comfortably take on more.
Business plan and industry
A business plan is a detailed outline of how your business will operate and make money. Business plans include a company’s goals, strategies and financial operations. Lenders want to see that your plan is realistic and that your business has a good chance of success.
Lenders also look at the industry your business operates in. Some industries are considered riskier than others, meaning you might get a higher interest rate or face stricter loan terms if you’re in a high-risk industry. Examples of high-risk industries include energy and technology.7 The SBA prohibits loans for certain types of companies, like life insurance companies or businesses that generate more than one-third of their gross yearly revenue from legal gambling.8
Collateral or personal guarantee
Collateral is property that the lender requires from a borrower to secure the loan. Eligible collateral may include real estate or equipment that your business owns or uses. If your business can’t pay back the loan, the lender has the right to take the collateral to recoup their losses.
A personal guarantee is a legal promise that you will repay the loan with your own money if your business cannot.
Offering collateral or a personal guarantee could increase your chances of getting a loan or help you get a better interest rate, and many small business loans require a personal guarantee.9
What is a personal loan?
A personal loan is a lump sum of money you borrow from a bank, credit union or lender like OneMain. You repay the loan in monthly payments — with interest — until it’s paid in full. Personal loans often have fixed interest rates and predictable monthly payments, so you know exactly what to expect over the life of the loan.
Personal loans can be secured or unsecured — and some lenders, including OneMain, offer both. A secured loan is backed by collateral, which means the lender can take the asset if you can’t repay the loan. Secured loans can boost your borrowing power and help build your credit by demonstrating your ability to manage debt responsibly. Secured loans may also offer lower interest rates than unsecured loans.
An unsecured loan, on the other hand, doesn’t require collateral. Instead, the lender examines your creditworthiness to determine if you qualify. Unsecured loans are a good option if you have a more favorable credit score and don’t want to use collateral.
You can typically use a personal loan for a wide variety of purposes including:
- Moving costs
- Home repairs
- Wedding expenses
- Credit card debt consolidation
- Auto repairs
If you need a loan quickly, a personal loan might be a good choice for certain types of expenses. A personal loan cannot directly cover business expenses. But if you’ve had to dip into your personal funds to cover a business expense, a personal loan might help you offset the costs.
Personal loan amounts can often range from around $250 to $100,000, and you’ll typically need to show proof of income, your credit history and your debt-to-income (DTI) ratio. Your DTI ratio is the percentage of your income that goes toward paying off debt. Your DTI ratio is calculated by dividing your total monthly debt payments by your monthly income. Lenders generally prefer a lower DTI ratio because it means you have more income available to cover living expenses.10
What’s the difference between a business loan and a personal loan?
Understanding the differences between business loans and personal loans can help you choose the right option based on your goals and financial situation. Here’s a breakdown of the key differences:
| Business loans | Personal loans | |
|---|---|---|
| Purpose | Used for business expenses | Used for personal and household expenses |
| Impact on credit | Affect your business credit score and may affect your personal credit score if you default11 | Affect your personal credit score |
| Application process | Typically require a comprehensive look at your financial health to assess risk, including tax returns, business plans, bank statements and other legal documents | Typically require documentation to verify identity, income and your ability to repay the loan as well as evaluation of collateral for secured loans |
| Loan amount and repayment term | Generally larger loans with longer repayment terms | Generally smaller loans with shorter repayment terms |
How to decide which loan is right for you
Choosing the right loan for you boils down to one key question: Are you going to use your loan proceeds for business purposes? If the answer is yes, then a business loan is the right choice for your needs. If you need a loan for other purposes, such as debt consolidation, home repairs or moving costs, a personal loan is a better fit.
If you’re not sure which type of loan makes sense for you, check with your bank or a financial or tax professional.
Find the loan that fits your goals
No matter what stage you’re at, the right loan for your needs could shape the path ahead. Take your time, think through your options and trust that the right choice will support your goals — not just today but in the long run.
Sources
1 https://www.nerdwallet.com/article/small-business/business-loan-vs-personal-loan
2, 3 https://www.bankrate.com/loans/small-business/how-much-can-you-borrow-with-business-loan/#loan-amount
4 https://www.bankrate.com/loans/small-business/how-to-get-a-startup-business-loan/
5, 7 www.nerdwallet.com/article/small-business/business-credit-score-basics
6 https://www.bankrate.com/loans/small-business/business-loan-requirements/
8 https://www.ecfr.gov/current/title-13/chapter-I/part-120/subpart-A/subject-group-ECFR6d9c2c4fd6e44c1/section-120.110
9 https://www.sba.gov/blog/unsecured-business-funding-small-business-owners-explained
10 https://money.usnews.com/loans/personal-loans/articles/how-much-can-you-borrow-with-a-personal-loan
11 https://www.nerdwallet.com/business/loans/learn/does-a-business-loan-affect-personal-credit
12 https://www.bankrate.com/loans/small-business/business-loans-hard-to-get-than-personal-loans/
This article is for general education and informational purposes, without any express or implied warranty of any kind, including warranties of accuracy, completeness, or fitness for any purpose and is not intended to be and does not constitute financial, legal, tax, or any other advice. Parties (other than sponsored partners of OneMain Financial (OMF)) referenced in the article are not sponsors of, do not endorse, and are not otherwise affiliated with OMF.
