A business loan might seem the natural choice if you’re looking for additional funding for your small business. But a personal loan is another popular lending option that you also may be able to use for business purposes — or to free up your finances so you can spend more of your money on growing your business.
Because there are pros and cons to both types of financing, it’s important to understand their differences and how a business loan vs. a personal loan might work for you.
What Is a Personal Loan?
A personal loan is a source of financing that a borrower typically can use for just about anything. (Although you may need to get approval from your lender if you plan to use the money directly for your business.)
This type of loan is typically unsecured, with the borrower agreeing to pay back the full amount, plus interest, in fixed monthly payments within a predetermined time frame. Some lenders also offer secured personal loans, however, and some offer personal loans with variable interest rates.
How Personal Loans Work
When you apply for a personal loan, you can expect the lender to review your personal financial information — including your credit score, credit reports, and income — to determine your eligibility. In general, the better your credit, the better your chances of receiving a lower interest rate.
Personal loan amounts vary, but some lenders offer personal loans for as much as $100,000.
Although most personal loans have shorter repayment terms, the length of a loan can vary from a few months to several years.
What is a Business Loan?
A business loan is a type of financing used specifically to pay for business expenses. It could be used to purchase equipment or inventory, for example, or to fund a new project.
There are many kinds of small business loans available — with different rates and repayment terms — including Small Business Administration (SBA) loans, equipment loans, micro loans, and more. Rates, terms, and loan requirements also can vary significantly depending on the lender.
How Business Loans Work
Applying for a business loan tends to be more complicated than getting a personal loan. For one thing, you’ll likely have to submit more paperwork to back up your application, including your business’s financial statements and an up-to-date business plan. The lender also will want to review your personal and business credit scores. And you may have to be more specific about what the loan will be used for than you would with a personal loan.
If your business is brand new, lenders may be reluctant to give you a business loan. Some lenders might ask you to put up some type of collateral to qualify.
Differences Between Business and Personal Loans
There are several factors you may want to evaluate if you’re trying to decide between a personal loan vs. a business loan, including the loan costs, how you plan to use the money, and how much you hope to borrow. Here’s a look at a few basic differences.
Cost Differences Between Business and Personal Loans
Whether you’re considering applying for a business loan or a personal loan to use for your business, it’s important to be clear about how much it could cost you upfront and over the life of the loan.
Interest Rates
Typically, interest rates for business loans are lower than for personal loans, but the rates for both can vary depending on the type of loan, the lender you choose, and your qualifications as a borrower.
Fees
Fees also can affect the upfront and overall cost of both personal and business loans, so it’s a good idea to be clear on what you’re paying. Some of the more common fees you might see with both types of loans include origination, application, packaging, and underwriting fees, and late payment and prepayment penalties.
Some fees may be subtracted from the loan amount before the borrower receives the money. But fees also may be folded into a loan’s annual percentage rate (APR) instead, which can increase the monthly payment.
Down Payment
For a larger business loan — a substantial SBA loan or commercial real estate loan, for example — you could be required to come up with a down payment. This amount can add to your upfront cost, but just as with a mortgage or car loan, a larger down payment can help you save money over the long term, because you’ll pay less in interest.
Whether you’ll need a down payment, and the amount required, may depend on your individual and business creditworthiness.
Different Uses for Business and Personal Loans
One of the biggest differences between business vs. personal loans is the way borrowers can use them.
A business loan can be used to finance direct business costs, such as paying for supplies, marketing, a new piece of equipment, business debt consolidation, or a business property. But it typically can’t be used for indirect business costs, which means a borrower can’t pay off personal debts with the money or buy personal property with it.
Some business loans have a very specific purpose, and the borrowed money must be used for that purpose. For example, if you get an equipment loan, you must buy equipment with it. Or, if you get a business car loan, you must buy a business car with the money.
Because you may be able to use the influx of cash for both business and personal expenses, a personal loan can give a borrower more flexibility. But personal loans are typically smaller than business loans, and they generally come with a shorter repayment term. It can be helpful to have a clear intent for how the money will be spent and to keep separate records for business and personal expenses.
It’s also important to note that some lenders put restrictions on how personal loans can be used, so you should read the fine print before applying and share your plans with the lender if asked.
Differences When Applying for Business and Personal Loans
The criteria lenders look at can be very different when approving a small business loan vs. a personal loan. Here’s what you can expect during the application process.
Applying for a Personal Loan
When you apply for a personal loan, the application and approval process is all about your personal creditworthiness. Lenders typically will review a borrower’s credit scores, credit reports, and income when determining the interest rate, loan amount, and repayment term of a personal loan.
Generally, you can expect to be asked for a government-issued photo ID, your Social Security number, and/or some other proof of identity. You also may be asked for proof of your current address. And the lender will want to verify your income.
Applying for a Business Loan
When you apply for a business loan, your personal finances still will be a factor, but the loan underwriters also will evaluate things like your business’s cash flow, how long you’ve been in business, your profitability, the exact purpose of the loan, trends in your industry, your business credit score, and more.
Besides your own financial information, the lender may ask for a current profit-and-loss statement, a cash-flow statement, recent bank statements and tax returns for the business, your business license and a business plan, and any other current loan documents or lease agreements you might have.
You also will have to provide information about your collateral if you are applying for a secured loan.
Structural Differences in Business and Personal Loans
Knowing the differences in how personal loans vs. business loans are structured could help you decide which is right for you and your business. A few factors that might affect your choice include:
Loan Amount
A business loan may be more difficult to apply for and get than a personal loan, especially if your business is a startup or only a few years old. But if you can qualify, you may be able to borrow more money with a business loan. While personal loan amounts typically top out at $50,000 to $100,000, some SBA loans can go as high as $5 million.
Loan Length
You’ll likely find personal and business loans with both short and long repayment terms. But generally, personal loans have shorter terms (typically a few months to a few years), while some business loan repayment periods can be 20 years or more.
Tax Advantages
Because a business loan is specifically earmarked for business expenses, deducting the interest you pay on the loan should be pretty straightforward when filing income taxes. With a personal loan, it might get a little more complicated. If you use the borrowed money only for business costs, you may be able to deduct the interest you paid. But if you use the loan for both business and personal expenses, you can deduct only the percentage of the interest that was used for qualifying business costs. And you should be prepared to itemize deductions, documenting exactly how you spent the money. Your financial advisor or tax preparer can help you determine what’s appropriate.
Support
Along with the traditional banking services you might expect to get with any type of loan, a business loan also may come with operational support and online tools that can be useful for owners and entrepreneurs.
Risk
When you’re deciding between a personal vs. business loan, it’s also a good idea to think about what could happen if, at some point, the loan can’t be repaid. If your business defaults and you have a personal loan, you (and your cosigner, if you have one) could be held responsible for the debt. You could lose your collateral (if it’s a secured loan) or damage your personal credit.
If your business defaults and it’s a business loan, the impact to your personal credit would depend on how the loan is set up. If you’re listed as a sole proprietor or signed a personal guarantee, it’s possible you could be sued, your personal and/or business credit scores could take a hit, and your personal and business assets could be at risk. If your business is set up as a distinct legal entity, on the other hand, your personal credit score might not be affected — but your business credit score could suffer. And it could be more difficult for you to take out a business loan in the future.
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Structural Differences in Business and Personal Loans |
||
|---|---|---|
| Business Loans | Personal Loans | |
| Loan Amount | Typically come in larger amounts (up to $5 million). | Generally are limited to smaller amounts (up to $100,000). |
| Loan Length | Usually have longer repayment periods (up to 20 years or more). | Generally have shorter terms (a few months to a few years). |
| Tax Advantages | Interest paid on a business loan is usually tax deductible. | Interest paid on a personal loan used for business expenses may be tax deductible. |
| Support | Lenders may offer operational support and online business tools to borrowers with business loans. | Lenders may offer more personal types of support to borrowers with personal loans. |
| Risk | Defaulting on a business loan could affect the borrower’s business credit score or business and personal credit scores (based on how the loan is structured). | Defaulting on a personal loan could affect the borrower’s personal credit score. |
Pros and Cons of Business Loans
There are advantages and disadvantages to keep in mind when deciding whether to apply for a business loan. A business loan can be more difficult to get than a personal loan, especially if the business is new or still struggling to become profitable. But if you qualify for a business loan, you may be able to borrow a larger amount of money and get a longer repayment term. It also could make it easier to separate your business and personal finances. And there could be fewer personal consequences if the business defaults on the loan.
| Pros of Business Loans | Cons of Business Loans |
|---|---|
| Borrowers may qualify for larger amounts than personal loans offer. | Applying can require more time and effort. |
| Longer loan terms available. | Qualifying can be difficult. |
| Interest rates may be lower. | Collateral and/or a down payment may be required. |
| Interest is usually tax deductible. | Loan must be used for business purposes only. |
| Lenders may offer more business-oriented support. | New businesses may pay higher interest rates. |
| Debt may be the responsibility of the business, not the individual (depending on loan structure). | Responsibility for the debt could still land on individual borrowers. |
Pros and Cons of Personal Loans
Though personal loans can offer borrowers more flexibility than business loans and they’re generally easier to qualify for, they can have both advantages and disadvantages when used for business. One major hurdle may be tracking whether the funds were used for business or personal expenses, which can be crucial, especially for income taxes.
| Pros of Personal Loans | Cons of Personal Loans |
|---|---|
| Application process is usually quick and easy. | Lending limits may be lower than business loans. |
| Qualifying can be less challenging than with a business loan because it’s based on personal creditworthiness. | Borrower doesn’t build business credit with on-time payments. |
| Can use funds for both personal and business expenses (unless there are lender restrictions). | Defaulting can affect personal credit score/finances. |
| Most personal loans are unsecured. | Interest rates are generally higher than for a business loan. |
| Interest may be tax deductible (when funds are used for business). | Shorter loan terms than business loans typically offer. |
Is a Business or Personal Loan Right for You?
Choosing between a personal loan and a business loan can be tough. You may want to do some online research, compare rates and terms, and/or ask a financial professional or business mentor for advice before moving forward with this important decision. Here are some things to think about as you look for a loan that’s a good fit for your personal and professional goals.
A business loan may make sense if:
• You want to keep personal and business expenditures separate.
• You’ve been successfully running your business for a while.
• You need more money than you can get with a personal loan.
• You hope to build your business credit.
• You want to limit your liability.
A personal loan may make sense if:
• Your goal is to grow your startup or new business.
• You plan to use the money for both business and personal expenses.
• You can find a personal loan with a lower interest rate than a comparable business loan, and the lender approves the loan for business expenses.
• You want to get the money as quickly as possible.
• You don’t want to secure the loan with collateral.
• You feel confident about your personal ability to repay the loan.
The Takeaway
Whether you’re a longtime business owner or a budding entrepreneur, there’s no one-size-fits-all solution to finding financing for your business. But there are several factors that can help you determine whether a personal loan or a business loan is a better fit for your needs.
Comparing lenders and their current loan offers can be a good place to start. Think about how much you hope to borrow, the monthly payment you can afford, and what you plan to use the money for. And as you move forward, keep in mind the impact (good or bad) the loan might have on your personal and business credit scores and the future of your business.
SoFi Personal Loans are easy to apply for, offer competitive interest rates, and have loan terms to fit a variety of budgets.
FAQ
Are business loans more expensive than personal loans?
Business loans typically have lower interest rates than personal loans. Still, it’s probably worth comparing both types of loans and the rates lenders are willing to offer you and/or your business before making a final decision between the two.
Is it illegal to use personal loans for business?
Most personal loans can be used for just about anything. Your lender may not even ask how you intend to spend the money. But it’s a good idea to check the lending agreement for any restrictions. And if the lender wants to know the purpose of the loan, you should be honest about your intentions.
Are startup loans personal loans?
There are a few different options for funding a startup, including SBA loans, family loans, or crowdfunding platforms. But if you have good credit and are confident you can make the monthly payments, taking out a personal loan could be an effective strategy for funding a startup.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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