When it comes to business financing, there are a lot of options out there. Business loans vs. personal loans are both popular options for borrowing money, but there are some key differences between the two.
But how do you know if a business loan or personal loan is the right choice for your needs?
Here’s a look at the key differences between these two types of loans to help you make the best decision for your business.Apply For A Business Loan!
What’s The Difference Between Business Loans And Personal Loans?
What Are Business Loans?
Business loans are a type of financing for companies to help them cover the costs of their business expenses.
The funds from a small business loan can be used for various business purposes, such as expansion, purchasing new equipment, or covering the costs of daily operations.
Small business loans typically have terms ranging from two to five years, and the interest rate on the loan will depend on the borrower’s creditworthiness.
There are several different types of business loans, each with its own set of terms and conditions.
For the purpose of this article, we will focus on microloans: they are the most similar to personal loans because of the amount of money they offer.
What Is A Microloan?
A microloan is a business loan for a smaller sum compared to other commercial loans. In addition, some financial institutions provide micro-business loans for even smaller amounts.
If you have launched your business recently, a micro-business loan can provide the funds you need.
A small business microloan is a small loan typically given to entrepreneurs and small business owners who may not qualify for traditional bank financing.
Microloans have shorter repayment terms than conventional business loans. In addition, many microlenders offer flexible repayment terms and lower interest rates than traditional lenders.
Microloans are an essential source of financing for entrepreneurs and small business owners who may not have access to traditional forms of financing.
Lenders typically provide loans to businesses that are too small or too risky for conventional lenders, such as start-ups or companies in underserved markets.
Microloans can help entrepreneurs start and grow businesses, create jobs, and stimulate economic activity in underserved communities.
Microloans and microcredits are different financial products.
What Are Personal Loans?
Personal loans are financial products that allow you to finance many types of personal expenses. Furthermore, you can use them to pay for business expenses (unless the lender has specific restrictions against it).
When you apply for personal loans, the lender won’t consider your business’s cash flow or performance. Instead, it would consider your personal credit and your personal income.
That’s why it’s such a good alternative for startups and sole proprietors that need loans.
If you have poor credit or a level of income that does not meet the lender’s specifications, your chances of getting a personal loan are low.
Business Loan Vs. Personal Loan: At A Glance
|Personal loan||Business loan (microloan)|
|Average interest rates||5% to 36%||11% to 44%|
|Use of capital||Personal expenses||Business expenses|
This Venn diagram will help you to compare the features of a micro-business loan vs. personal loan:
- Micro-business loans are usually for up to $50,000. However, the average microloan size is $13,000.
- You can use micro-business loans for practically any business purpose. For example, for working capital or to buy equipment and inventory.
- Some lenders may ask for collateral or a personal guarantee.
- These loans are for borrowers who have low capital requirements.
- Depending on the lender, they might help increase the business credit score.
- You can find both an unsecured or a secured business loan.
Get Approved For A Loan Today
Camino Financial offers microloans up to $30,000 with minimal requirements. If you need more capital, we also have small business loans.
Here is a list of the main features of personal loans:
- You can get up to $50,000 (although you can find lenders that offer up to $100,000). Although, the average amount is $7,104.
- You can use personal loans for almost any purpose. The lender will not check how you deploy the funds. That means you can use personal loans for starting a business or strengthening your startup.
- Personal loan lenders usually don’t require you to put up any collateral.
- The lender might not approve your personal loan application if you have poor credit.
- Getting a significant amount depends on your income level and your personal credit score.
- Personal loans are typically unsecured, but you can find a secured loan option if you need to.
Personal Loan vs. Business Loan Rates
The interest rates on a micro-business loan can go from 11% to 44%. They are usually higher than those on a traditional business loan.
Interest rates on personal loans can range from 5% to 36% peor even higher. The rate would depend upon the borrower’s personal credit score.
Pros And Cons
These are the advantages of microloans:
- Depending on the lender, a small business loan might help build a business credit history.
- They have more lenient requirements compared to other business loan types.
- Businesses are more likely to qualify for funding.
- Business loan amounts are small, and the payout time is short. That means you make payments that don’t cause undue strain on finances.
- Usually, lenders don’t ask for collateral to secure the loan.
- Borrowers have access to capital within a few days.
And their disadvantages are:
- Lenders might charge higher interest rates to compensate for the risk. This increases the borrower’s repayment amount
- If you can’t make timely payments, you damage your credit score and history.
- Microloans aren’t available in large amounts. Consequently, you may not borrow enough money to match what you need.
- There can be fees and penalties that elevate the cost.
Learn more about the pros and cons of microloans
Here are the advantages of personal loans:
- Some lenders can still approve the personal loan if you don’t have a personal credit history or score.
- Your credit score should increase within 3-6 months if you make timely payments.
- Personal loans are usually unsecured (no assets required).
- Personal loans tend to have a shorter repayment term.
- Many personal loans require minimal documents, accelerating funding to a few days.
- Borrowers can use personal loan proceeds for various purposes.
- Personal loan interest rates tend to be higher.
Their disadvantages are:
- Poor credit applicants receive the highest rates, making it harder to make payments.
- Lenders can charge 1% to 6% origination fees or a prepayment penalty when paying off the loan early.
- For anyone that routinely overspends, personal loans can create a debt cycle.
- Borrowers with seasonal income may not be able to commit to a longer term or make payments on time.
- Applicants are personally liable for repaying the loan
General Approval Requirements
A majority of lenders require a minimum credit score.
- have an existing business
- have enough income to repay the business loan (the lender will review your business finances)
- be able to submit identity information
- match lender requirements for annual sales and several years in business
- have minimum personal and business credit scores
- you’ll need to have a business bank account.
- some lenders will ask to see a business plan (at Camino Financial, we don’t need you to show us a business plan).
Additionally, you must use the funding for business purposes.
If you have bad credit, lenders look at your business’s history and other factors. Lenders aren’t favorable to applicants that have tax liens or recent bankruptcies.
You can find secured and unsecured microloans, which may or may not require collateral.
Most lenders ask that applicants:
- be of legal age
- have a checking account with a favorable credit history
- have enough income to repay a loan
- they may also require a minimum personal credit score and annual income
Some lenders only approve loans to permanent residents with a social security number.
Lenders look at an applicant’s debt-to-income ratio to verify there’s enough money to repay a loan.
Use Of Capital
You can use microloans to:
- buy inventory
- pay employees
- equipment financing
- ease commercial space
- and more
You should devote the usage of microloan funds to your business’s greatest need.Get A Microloan
Personal Loan For Business
Personal loans offer flexible use of funds. In other words, you can use them for almost anything (both business and personal expenses).
You can use a business personal loan to pay for business expenses like:
- startup or emergency expenses
- consolidate debt
Before you apply for an online personal loan, make sure to know the use-of-proceeds restrictions. Also, remember that you are personally liable if you don’t repay the loan; not your business.
Some lenders restrict how you can use the loan proceeds (both for a personal loan vs. business loan).
Are They Tax Deductible?
Taxes could be an essential consideration when deciding between a micro-business loan vs. personal loan.
With business microloans, you can only claim the interests as a tax-deductible business expense.
The interest may or may not be deductible depending on how you use the loan proceeds. When used for your business, the interest you pay should be tax-deductible.
Check with your accountant before filing your tax return if you aren’t sure.
When To Use A Microloan And When A Personal Loan
Use these general guidelines to decide if you should turn to a micro-business loan vs. a personal loan.
Use Business Loans When
- You’ve been in business for a while and only need a small amount (and you’re confident you can repay in a few months).
- You don’t qualify for a traditional loan from your bank or credit union.
Use Personal Loans When
- Your business is new, and you can’t provide the required documentation for business loans.
- You have a high credit score and enough personal income.
- You’re confident that you will be able to separate your business accounting records from your personal transactions.
- They’re available with online lenders, banks, and credit unions.
If you’re still unsure about what financial product to get, see if you meet any of the following conditions:
If Your Business Is New
As a general rule, business lenders will require you to have been at least 2 years in business.
Camino Financial will only ask that you’ve been active and registered for 9 months.
This means people who want to start a business or have a relatively new company cannot apply for micro-business loans.
But personal lenders don’t have this requirement. So you can use a personal loan for a business startup.
If You Need A Significant Amount Of Money
If you opt for a personal loan to meet your business requirements, you can only raise limited funds.
That’s because the lender will set the personal loan limit based on your personal income and credit score and not on your business’s potential.
If you need more capital, a business loan is the better option.
If You Need Money Fast
A personal loan is probably the better option if you need money fast (they can be used as emergency loans). This is because you can usually get approved for a personal loan more quickly than a business loan, and you won’t have to provide as much documentation.
That said, it will all depend on the lender. For example, some business online lenders can offer a process that is almost as fast.
Be Careful About Commingling
Commingling is when you don’t keep your business and personal finances separate. There are risks to commingling.
The likelihood of commingling could be higher if you use a personal loan for your business. This means you need to be more careful with the money to avoid problems when you file your taxes.
That’s why if you need cash for business purposes, a business loan will always be a better idea.
Your Best Option As A Small Business Owner
If your firm requires funds as soon as possible, a loan from Camino Financial could be your best option. We’re online lenders that offer small business loans keeping our motto, “No business left behind,” in mind.
We offer microbusiness loans for up to $30,000.
It’s easy to qualify for a Camino Financial loan:
- Our minimal requirements make it easy for many applicants to get a loan with us.
- It takes just a few minutes to complete our application, and you’ll know immediately if you prequalify.
- We can transfer the funds in a matter of days.
- Our application process is entirely online. This means there is no paperwork needed.
- We don’t ask for collateral.
Prepayments don’t attract penalties with Camino Financial.
If your business requires funds, apply for a loan.Apply now!
How do you get a loan?
The more professional and prepared you are, the better.
Make sure you complete the application entirely and accurately. Gather supporting documents in advance—for example, business financial statements, tax returns, and copies of licenses.
Businesses with a sound financial history have a better chance of getting approved, whether they choose a micro-business loan vs. personal loan.
How do you calculate interest on a loan?
To calculate simple interest, use this formula.
Multiply the principal (loan amount) times the interest rate times the loan term (length of loan).
For example, the interest on a $5,000 loan for 3 years at 18% is $2,700 (total interest for 36 months).
Are there any other alternatives to debt financing?
If personal and business loans are not for you, you still have other alternatives.
You can receive financial help from investors willing to offer cash in exchange for your business’s equity. Along with financial support, investors share business knowledge.
An intelligent way to access free capital is through a grant program since eligible applicants aren’t required to repay the grant.
You can also get cash from friends and family.
Small Business Administration loans are also another alternative. However, while they have low-interest rates, the requirements of an SBA loan make them very hard to get.
A business credit card could also be a good alternative if you need to finance more minor, recurrent expenses.