Everything You Need to Know – Forbes Advisors

Choosing between a business loan and a personal loan mainly depends on your situation and needs. If you’re starting a new business, it may become easier to qualify for a personal loan as you get your business off the ground. However, not all personal loan lenders are able to use the funds for business-related expenses. Business loans, on the other hand, may be best for established businesses that need money to purchase equipment or otherwise finance their business.

What is a business loan?

A business loan is a financial product specifically designed to help you operate or grow your business. Business owners can use this type of financing for a variety of purposes, including capital expenditures, operating expenses, and working capital needs. Small business loans typically have longer repayment terms than personal loans and often require some form of collateral and a personal guarantee from the business owner.

How do business loans work?

Business loans are typically provided by banks, credit unions, and other financial institutions. Some online lenders specialize in lending to businesses and may impose more accessible eligibility requirements than their traditional competitors.

Lenders base much of their approval process on the financial status of the business, such as earnings and outstanding debt. Applicants may also need to explain the purpose of the loan funds. This is something that is not usually required for personal loans.

Once approved, the lender pays the loan proceeds in full and begins accruing interest on the entire amount owed. Funding speeds vary, but once approved and confirmed, funds may be available as early as the next business day. Borrowers are typically required to make monthly payments, although some business finances may require more frequent payments.

Here are some important business loan details:

• eligibility requirements. Lenders want applicants to have a reliable source of income and a detailed business plan outlining their growth strategy. They also look at factors such as the credit score of the business and owner. This must be at least 680 to qualify with traditional lenders. Also, most lenders impose minimum term and minimum revenue requirements for their business. Typically six months to two years and $100,000 to $250,000 each.
• collateral. Depending on the lender and the terms of the loan, you may be required to provide some form of collateral, such as business equipment or inventory. Many business lenders also require that the business owner personally guarantee the loan.
• loan amount. Business loan amounts vary depending on the lender and type of loan. Generally, however, loans are available from around $1,000 to over $5 million. These borrowing limits are significantly higher than personal loan limits. These are most useful for business owners who need to cover major purchases or ongoing expenses.
• repayment terms. Business loans typically have repayment terms of 3 to 10 years, but can be as long as 25 years, as the loan amount is often high. This means your monthly repayments can be lower than with a personal loan. Still, interest accrues over a long period of time, making borrowing costs higher over the life of the loan.
• interest and fees. The Annual Percentage Rate (APR) for business loans typically ranges from 6% to 30% or more, with various fees. Standard lender fees vary but may cover origination, processing, underwriting and application costs.

What is a personal loan?

Personal loans are unsecured loans that borrowers can use to cover various expenses and expenses. From medical bills and home repairs to weddings and vacations, sometimes even business expenses.

Banks, credit unions, and online lenders offer personal loans and require no collateral. These loans are often easier to obtain than traditional business loans because they have flexible credit score requirements and do not require business history. Please check with your lender before applying as it cannot be used for any purpose.

How do personal loans work?

Personal loans are available from many lenders, including online lenders who offer accessible eligibility criteria. Depending on the financial institution, borrowers may be able to apply in person, over the phone, or completely online.

To get a personal loan, borrowers must provide basic information about their identity and income, but the application process is usually less rigorous than for business loans. Because of this, approvals are often faster, with some borrowers receiving approvals almost immediately.

Funds are disbursed in one lump sum and are available as soon as the borrower is confirmed. The loan is repaid monthly and accrues interest on the entire balance. As with business loans, the longer the repayment period, the lower the payments, but the higher the overall cost as interest accumulates over time.

Here are some important personal loan details:

• eligibility requirements. Borrowers must have a score of at least 560 to qualify for personal loans, but borrowers with better credit have access to more competitive terms. Some online lenders specialize in borrowers with limited credit histories. Lenders may also consider the prospective borrower’s income, debt-to-income (DTI) ratio, and employment history. Other factors such as immigration status, age and ability to provide collateral may be considered.
• collateral. There are no collateral requirements as personal loans are most commonly unsecured. However, some lenders may require a joint guarantor or guarantor if the borrower’s credit score is too low. Similarly, some lenders offer secure options with higher loan amounts.
• loan amount. Personal loan amounts vary by lender and range from a few hundred dollars to $100,000. The amount of loan a borrower is eligible for depends primarily on their needs and creditworthiness.
• repayment terms. Personal loans typically have a fixed interest rate and repayment terms ranging from 1 to 7 years. The longer the repayment term, the lower the monthly payment, but the higher the overall cost due to additional interest.
• interest and fees. Interest rates on personal loans typically start at around 3% for most eligible borrowers and can go up to around 36%. The interest rate a borrower is eligible for depends on their credit score, lender, loan amount, and repayment term. Fees may also apply, including an origination fee of approximately 1% to 8% of the loan amount.

Advantages and disadvantages of business loans

Strong Points

• Flexible Loan Uses: Borrowers can use business loans for capital expenditures, operating expenses, working capital needs, and other business expenses.
• High borrowing limit: Borrowers often have access to more capital than personal loans provide, with loan amounts ranging from about $1,000 to over $5 million.
• Long repayment terms: Loans typically have longer repayment terms and are easier to manage than consumer loans. A borrower usually has to repay a business loan over a period of 3 to 10 years, and the term can extend to his 25 years.
• Competitive Interest Rates: Business loans are often offered at competitive interest rates (ranging from 6% to 30%) compared to other financing types. That said, low interest rates are usually accompanied by collateral requirements, making it difficult to qualify for a loan, especially for new businesses with limited assets.
• Robust Customer Support: Business loans typically come with a dedicated customer service team that has experience dealing with small business owners. Using personal loans for business purposes means borrowers are less likely to receive tools and support tailored to small business owners.

Cons

• Stringent eligibility requirements: Banks and other traditional lenders often have strict loan approval requirements. This includes personal and business credit scores and business financials. Many lenders also impose minimum earnings and hours of operation requirements.
• Collateral requirements: Lenders often require some form of collateral to secure a loan. This can make it difficult for new business owners with no real assets to raise capital.
• High interest rate: Business loans with no collateral requirements may have higher interest rates than those secured by assets in your business.
• A personal guarantee may be required: Some lenders may require a personal guarantee from the business owner. That said, all personal loans require a personal guarantee.
• Slow fundraising: Business loans tend to take longer to process than personal loans, so it may take weeks before the funds are released. Still, some lenders promise same-day or next-day funding for business loans.

Pros and Cons of Personal Loans

Strong Points

• Flexible use: Borrowers can use personal loans to cover a variety of expenses, including medical bills, home repairs, vacations, weddings, and unexpected expenses. That said, some lenders may not offer personal loans for business.
• Fast fundraising: Personal loans can be approved and financed quickly. Often the same day.
• Accessible Credentials: Personal loans usually have more favorable terms than business loans. Additionally, applicants are not required to provide the extensive financial documentation required for business loans.
• No collateral requirement: Unlike business loans, personal loans do not require any form of collateral. This makes it a popular option for borrowers with no real assets.
• Competitive Interest Rates: Interest rates for personal loans vary from 3% to 36%, depending on the credit score of the lender and borrower. Ultimately, interest rates and fees depend on factors such as the size of the loan and the creditworthiness of the borrower.

Cons

• Short repayment terms: Unlike business loans, personal loans have shorter repayment terms, typically one to seven years. As a result, monthly payments can be higher and harder to manage.
• Limited funds available: Most personal loans have a maximum amount of around $50,000, but some lenders can go up to $100,000. Still, these amounts are lower than business loans, which can make it difficult for some borrowers to access needed funds.
• Interest rates may be higher: High-risk borrowers may see higher interest rates on their personal loans. Additionally, some lenders may charge origination and application fees, which can further increase borrowing costs.

Can I use a personal loan for business?

It is possible to use a personal loan for business purposes. However, the terms of personal loans are usually not suitable for business and are not usually recommended. Personal loans may also be less desirable than traditional business loans due to their shorter repayment terms and higher interest rates. Additionally, some lenders do not allow borrowers to use personal loan proceeds to cover business expenses.

That said, most lenders do not require borrowers to provide collateral for personal loans. Business loans typically include stricter eligibility criteria than personal loans, as most lenders prefer to work with established companies with strong cash flow.

Ultimately, when deciding whether to use a business or personal loan, assess your individual needs and circumstances before making a decision.