What Is The Difference Between A Business Loan And A Personal Loan?

Business Finance 6 Sep, 2024

When looking to grow your business, you need to make sure you understand what type of loans you should explore.

I am regularly asked, should I just get a credit card, or a personal loan instead of getting a business loan. If you are after business funding, then you should always consider a business loan facility first.

What is the difference between Business Loans and Personal Loans/Credit Cards?

The difference between personal loans and small business loans is your personal guarantee. You use your personal credit history, whereas business loans are measured against the business financial records and success.

As a guide, personal loans are meant for personal purchases, whereas business loans are meant to fund business-related purchases.

Personal loans

Advantages of personal loans

Easier approval – You might have a better chance of approval for a personal loan, especially if you haven’t been in business for long.
No collateral – The best personal loans are unsecured. You don’t have to put up security against the loan.

Disadvantages of personal loans

Funding limits – Personal loans are limited to a maximum of $50,000
Regulations – Personal loans are fully regulated, so the financier must verify you and your ability to repay the funds. There are many more factors added to lending to a consumer and the lender needs to be more detailed in their research or face large fines.

Business loans

A business loan is specifically intended for business purposes. It is designed to help you start or expand a business, and it can come with either a fixed or variable interest rate, either secured or unsecured.

With a business loan you can update technology and equipment, purchasing new stock, pay rent on a commercial space, hire new staff, market your business, and have cash at hand for your day to day running of your business.

A business loan should be used for purchases that will generate additional revenue but fit withing your cashflow to offset the cost of the loan.

There are many advantages when you borrow using a small business loan.

Limiting your liability – Depending on your legal structure and the type of business loan you want; your liability may be more limited than a personal loan. Especially in the case of default or the inability to pay.
Building business credit – Taking out a business loan will help you build your business credit and enhance your ability to gain further credit.
Larger loan amounts – Personal Loans are limited to $50,000. Business loans are only limited by your businesses ability to repay the debt.
Lower interest rates – You may qualify for a lower interest rate for your business. Interest rates are controlled by the type of loan, the size of the loan and the overall risk of lending.
Keeping finances separate – taking out a business loan helps you keep personal and business affairs separate. It saves you time when preparing your tax, but it could also save you a lot of money in the form of tax deductions.

Other items to consider

Poor historical performance. Any effect on your credit rating, if serious enough, can affect the business its borrowing capacity. However, negative credit history will be removed from credit files over a 5-7 years.
A good Accountant. Constantly chasing tax deductions to reduce your tax responsibilities is fine short term, and it helps with the cash flow. But the negative side to this is your accounts won’t show your true profit and may limits your credit options. This balance is an ongoing battle and you must make that decision.

Using business finance rather than personal finance makes a lot of sense. Always try to keep your business finance away from your personal finance.