As a small business owner, when funding your company using a lender, you will be faced with two main choices for financing, a personal loan or a business loan.
But which is the best choice for you? Well, let’s take a look at each, as well as their pros and cons to help you decide.
Personal Loan vs. Business Loan: Which is a Better Choice for Your Small Business?
About Personal Loans
A personal loan can be used to make a wide range of personal purchases. However, you are typically not required to spend your loan funds on anything specific when taking out the loan; hence, they can also be used to cover any business expenses.
Applicants can apply for a loan amount up to $50,000 with a loan term of typically between 12 to 60 months.
However, you must have a good personal credit history to qualify. This means, should you default on the loan, you will be held personally responsible for the remaining balance.
A personal loan offers various perks, including they provide fast funding, and they are also fairly easy to get approved for. They are also unsecured, meaning they don’t require you to provide collateral to take out the loan.
About Business Loans
A business loan enables applicants to qualify for up to $5 million in funds to finance their small business needs, including payroll, equipment, and more. However, unlike a personal loan, it comes with specific restrictions that can only be used for business-related purchases.
A small business loan term can also be as short as just a few weeks to up to 25 years, such as when purchasing real estate.
To qualify, the lender will consider your business credit history rather than your personal credit history. They also typically require your business’s financial statements and other paperwork to secure the loan.
The loan may also be unsecured or secured, meaning you may be required to put up collateral.
However, in the end, your overall goal for securing the business loan should be to generate additional revenue. In some cases, you may also be able to use a business loan to pay down existing debt or to refinance.
How to Choose Between a Personal Loan and a Business Loan
If you want to keep your personal and business finances separate, then a business loan may be for you, and it also enables you to save more money on deductions.
A business loan will also enable you to establish a business credit history to show lenders your creditworthiness, and it’s also a good option for those looking to limit their liability with debtors. If you’re getting ready to sell your business or start a new one, business loans are very beneficial.
If you’re unsure where to begin, many online platforms, such as Lantern by SoFi, have the ability to compare one small business lender to another, enabling you to examine a multitude of financing options, including SBA programs, small business financing options, and personal loans all in one convenient location.
However, if you are only seeking a small loan amount or fewer loan restrictions, then a personal loan may be for you.
In the end, when choosing a small business lender, according to Lantern by SoFi, “explore small business and personal financing options” from a network of lenders, and don’t be afraid to seek help from your chosen lender when in doubt.