Whether just starting a business or trying to expand it, many business owners find themselves in need of a loan at some point during the growth of their company.
For those in need of a loan, there are several options. You could choose to get a business loan, or you might choose to take out a personal loan and use the money for your business. Let’s break down the advantages of each loan type to help you decide which is right for your business.
The case for business loans
Business loans are loans that are taken out expressly for business purposes. They can either be secured (the business uses some of its assets as collateral), or unsecured (the lender can make a general claim on the business assets). Secured business loans typical carry lower interest rates. In either case, lenders will want to see the business’ financial history, or for newer businesses, a business plan.
It can help build business credit
Like individuals, businesses build up credit, which can affect many parts of their finances as they grow.
“If you rely on personal loans, you’re missing a huge opportunity to start building a credit profile for your company,” says Gerri Detweiler, head of market education for Nav. “Like personal credit, your business has its own credit scores and profile. Building this will make it a lot easier to get less expensive business funding, trade credit, and may even lower your insurance costs.”
The interest that you accrue or pay on a business loan probably can be deducted from the business’ taxes. With a personal loan there are no such advantages. This can be a relief when dealing with the stresses of tax season, and can save you and your business money.
Business loans are set up to serve businesses
A personal loan is just what it says, personal. If you don’t make the payments on time, the bank will come after you and your personal assets. While the same can be true for business loans, not all lenders require personal guarantees. Even if the lender does, if you are part of a multi-owner company, you may not bear all of the risk of the loan.
“It is usually wise to take the loan for the entity that it will serve,” says Paul Kroger, founder of Foxytrades.com. “If it is for your personal needs, take a personal loan. If it’s for commercial undertakings, take out a business loan. In the latter case, this will ensure that all the risks remain inside your business endeavour and should it fail, you are personally free of any additional obligations.”
You need a lot of money
If the business requires a higher amount of startup capital, it may be more feasible to obtain a business loan. Personal loans often have lower limits than business loans, but in both cases, the maximum you can get will depend on things such as income and collateral.
The case for personal loans
Your personal credit is stronger
When trying to raise your chances of approval for the loan, the smart play is to go with the entity that has the better credit score.
“When giving out a loan, the bank is interested which entity — you or your company — has a better chance of returning their loan,” says Kroger. “If your credit score is better than your company’s, it will be easier for you to procure a personal loan and vice versa.”
You and your business are one and the same
Sometimes the decision can be made for you depending on how you set up your business. If your business is a sole proprietorship, you and your business are one and the same in the eyes of a lender.
“Until you create a legal entity for your business [a corporation, partnership or LLC, for example], your business is essentially you,” Detweiler says. “It makes it much harder to get business loans in the name of your business and without risky personal guarantees.“
The business hasn’t generated income
In the case of newer businesses without a profitable balance sheet to show, it can be harder to get approved for a loan. The loan approval process may involve showing lenders your business plan and convincing them the company is worth the investment. That can often be a tricky proposition, and if approved it may still result in higher interest rates than a comparable personal loan.
What is best for your business
What matters most is whether you or your business is more likely to get approved for the loan. If the odds are relatively equal, getting a business loan can help build the business’ credit, and may offer larger loan limits with less personal guarantees. If you want to compare loan options, head to our loans section and check out some of our top personal and business loan lenders.