Business loans and personal loans are both reasonable options for individuals and companies that need quick cash on hand, but they vary in how you can use them. It’s important to consider your financial needs (i.e., looking for startup funding or needing to supplement cash flow) to determine which loan type is right for you. Differences between business and personal loans involve use of capital, tax deductions, loan terms, loan amounts, and required collateral.
Business loans are typically used to pay off direct business expenses, such as supplies, inventory, manufacturing payments, etc. and they may be tax-exempt or tax-deductible dependent on local regulations.
A business loan is also likely to have a much longer payback term than personal loans, although you can choose to have a short-term business loan. Loan terms can range anywhere from a couple of years to 20 years depending on your situation, industry, and other factors. The loan term will also be determined by a combination of your financial situation and ability to pay back the loan and the total amount of the loan, which can range anywhere from $500 to $5 million (and may vary with each lender or financial institution).
Because business loans can be much greater in value and can have a significantly longer loan term, they are typically secured with collateral, which is an item of value you own that the lender can repossess if you fail to pay the loan. Some examples include real estate property, vehicles, cash, investments, and other valuable possessions.
In general, business loan interest rates are lower than those of personal loans, but are impacted by things like your business credit score, how your business earns income and is owned, business size, ability to repay the loan, etc.
Personal loans can be used for direct business expenses the same way a business loan can, but they can also be used for startup funding as well as indirect lifestyle expenses like buying a house nearby, purchasing a car, etc. This type of loan is not considered income, so they are not tax-deductible.
While you can payoff business expenses with a personal loan, it may not be ideal because lending limits are lower, loan terms are shorter, and interest rates are higher. Personal loan terms tend to fall between a few months to a few years and range from $1,000 to $100,000 in most cases. Because of these conditions, however, personal loans do not require collateral to secure.
Similarly to a business loan, personal loans and their interest rates will be determined by your personal credit history, what the loan will be used for, your ability to pay it, and so on.
Additional Factors to Consider
When deciding between a business or personal loan, it’s important to consider everything from the amount of capital you will need, what your credit scores look like, financial history, and what your future business objectives are.
For example, if your business credit score isn’t in good shape but you have a strong personal credit score, a personal loan might be the more reasonable decision. You can also boost your business credit score if you have an established company and can take a short- to mid-term business loan and pay it off quickly.
There are a lot of options when it comes to securing loans, so it’s critical to do your research and weigh every option to find the best fit for you and your business. If you need further guidance in learning about loan options, don’t hesitate to reach out to our dedicated team at Republic Bank of Chicago by calling 800-526-9127, or head to our resources page for more helpful financial information.