Choosing a Personal Loan vs. Business Loan: Which One is Better?

Any business owner looking to start up or expand their business will have various financing options. These include crowdfunding, angel equity, loans, among others. 

Of all the available options, loans – personal loans and business loans – are the popular sources of business funding that most people will consider. But which of these two should you choose? 

Keep reading to understand the difference between the two and the suitability of each.

Personal loans have easy approval.

When it comes to ease of approval, personal loans carry the day. That is perhaps because you’ll not be required to secure the loan by putting up any collateral.

However, financial institutions often require documentation indicating your financial status or personal credit score to approve a personal loan application. In most cases, a current paystub is sufficient proof of employment and income.

Pay stubs are usually obtained from your employer. However, you can use an online paystub creator platform to generate a pay stub by providing details such as the company name, work schedule, and salary information. Be sure to have the pay stub signed by your employer before using it as a legal document. 

On the other hand, having an excellent credit score is a requirement when applying for business loans. That means lenders will require you to provide your personal and business credit score, which puts most startups at a disadvantage. On top of that, lenders may require you to put up some collateral to secure the business loan. These can include treasury bonds, stocks, corporate bonds, certificates of deposit (CDs), and other business assets such as vehicles and real estate.

Additionally, to have your business loan application approved, lenders may require you to present proof of sufficient annual revenue and industry history. All these make business loans less suitable for startups.

Business loans have higher lending limits.

If you are looking to borrow a considerable amount of money, a business loan might be the best option for you. Unlike personal loans, business loans offer much higher lending limits. However, the actual amount of money you qualify for will depend on the income and the type of security you want to put up as collateral.

Business loans have longer repayment tenure.

Because personal loans are designed for personal use, they come with short repayment periods, which may not be favorable for new businesses.

Conversely, business loans can have their repayment periods stretched over several years. More extended repayment options are good for business as it allows more time for loan repayment, easing the burden on your business. 

If you are looking for low EMIs per month on your loan repayments, a business loan should be the way to go.

Business loans have favorable interest rates.

Personal loans are designed to help borrowers meet their individual needs such as home improvement, finance a wedding, buy a car, etc. Therefore, their interest rate is relatively high compared to business loans. 

In comparison, business loans are designed with the business in mind and offer lower interest rates. It would be better to go for a business loan instead of a personal loan whenever you have the option.

Personal loans are less flexible.

While personal and business loans are both relatively flexible in terms of how you use the funds, the former has more restrictions than the latter.

In some instances, you may be required by the lender to set aside a given amount for debt consolidation or other purposes. Additionally, some lenders may not let you borrow a personal loan if it is meant for business. 

In contrast, business loans offer higher flexibility. The borrower is at greater liberty to choose how to spend the borrowed funds on business-related expenses with very few exemptions.

Which is the better choice; Business loans or personal loans?

The question of which option is better may be dependent on the prevailing circumstances. 

If you are a startup, your chances of getting funding through business loans are very slim. That is perhaps because your business may have a low customer base, inadequate management, or lack the prerequisite credit to qualify for a business loan. Under such circumstances, a personal loan would be the best option for you. 

If, on the other hand, you have an established company and you are looking to expand, a business loan should be the way to go. From an entrepreneurial point of view, these loans are more business-friendly and should always be the option whenever faced with a choice between the two.

Irrespective of the type of loan you have access to, your business success will depend on how well you will utilize the funds you get. Therefore, whether you choose a personal or business loan, make sure you plan well in advance on how you intend to use the funds.

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