People take out loans for a huge range of reasons, and there are often specific loans targeted for this. For example, if you are wanting to buy a home, it is best to take out a home loan, you can get a car loan for a car, and so on.
However, personal loans are a broad type of loan that people take out for their own personal reasons. This means the loan itself often overlaps into other categories as well. For this reason, people are often confused by the difference between a business loan and a personal loan when starting up a business.
We are going to take a look at the differences to help you work out which one would be best for your situation.
What Is A Personal Loan?
A personal loan is a fixed amount of money you take out, which is then paid back to the lender over a fixed amount of time. They can either be unsecured, which means no security is offered up in exchange for the loan or secured, where the loan is guaranteed by an asset. An unsecured loan often comes with a higher interest rate, but with more flexibility.
People take out personal loans for a huge array of reasons, often to cover an unexpected expense that wasn’t foreseen, such as a medical emergency, a tree falling on the house or to make repairs on a car.
What Is A Business Loan?
A business loan is specifically intended for business purposes. It is money you borrow to help you start or expand a business, and it can come with either a fixed or variable interest rate and can be either secured or unsecured.
Businesses often need capital behind them when starting up to fund all the initial expenses before they start earning. Business loans can also be used when a business is expanding and needs a helping hand in the process.
What are the Main Differences?
Wondering whether it is better to take out a business loan or a personal loan when starting up your business? Here are the main differences:
A personal loan is often easier to obtain.
A personal loan is often dependant on your credit situation and your personal financial situation. On the other hand, when taking out a business loan banks often want detailed projections and business plans of how you intend to repay that cash in the future.
Borrowing amounts can be greater with a business loan
As the loan is based off your business and how you plan for it to grow in the future in order to pay back the loan, you are often able to secure a larger loan.
Business loans take longer
You can take out a personal loan and have that money with you much faster than with a business loan. With applications becoming quicker for business loans, they are still not as quick as a personal loan.
A business loan builds credit
Just like your personal credit is based on your finances as an individual, businesses also have a line of credit based on their performance. Taking out a business loan will help you build up a business credit score which could come in useful down the track.
A personal loan leaves you personally liable if you are unable to repay the loan. This means your personal credit score will take a hit if anything goes wrong.
When Should I Be Using Them?
Wondering which one might be the best option for you and your startup?
It is worth considering your own personal circumstances and basing your decision off what you need and which loan will support you the most.
Often, if you are setting up as a sole trader, a personal loan can be the perfect choice. You can get the money fast, give your business the boost it needs, and repay the loan in a timely manner. There is often no need to go to the trouble of securing a business loan, which would involve a lot more effort and attention on your business and it’s projections for the future.
If you are starting up a company and don’t have a business history, you may also find a personal loan is the best approach. It can often be harder to secure a business loan with no experience behind you.
However, if you are setting up a company a business loan might support your goal better. You are able to apply for more money than a personal loan, allowing you to put that best foot forward from the get-go and give your business it’s best chance to succeed.
And if you are looking to expand your business, then a business loan once again is your best bet. You already know how your business is performing and can use these figures to forecast your growth, which will make it easier to take out a business loan.
At the end of the day, you need to shop around and find out which loan will get you the best deal for your needs. Weigh up the pros and cons of each and start applying.