Business Loan vs. Personal Loan: How They Are Different
Prior to doing this, you’ll need to know what the differences are between these two financing processes. In this post, we’ll detail how these two types of loans differ, so that you can make sure you’re applying for the right funding option.
Personal Loans vs. Business Loans: How Do They Differ?
1. The Loan Amounts
One of the first differences you’ll notice when comparing personal and business loans is the financing amounts that you can apply for. Generally, personal loans tend to come in smaller amounts, and they’re usually ‘unsecured.’ This means that to qualify for a personal loan, you won’t be asked to submit personal assets as collateral. This is beneficial because you won’t lose this collateral in the event that you can’t repay your loan.
In comparison, a business loan will typically have a higher amount range, and it can be issued on a ‘secured’ basis. What this means is that you may need to submit collateral or a guarantee for the loan. By doing this, if you’re unable to repay the lender, they can collect the collateral to make up for any damages.
In some instances, this can make it difficult for start-up businesses to obtain a business loan as they have nothing to use as business collateral. However, there are lenders who take this into consideration and are willing to lend to new businesses. If you own an established business, this shouldn’t be an issue, as you likely have assets to provide if necessary.
In addition, there are also other lenders that operate on an unsecured basis. If you’re pursuing a business loan, you may want to consider lenders that are comfortable providing unsecured business loans. This way, you can protect your assets while attaining necessary funding for your business.
If you’re a small business owner and need of a certain amount of money to maintain your operations, it may be more beneficial to apply for a business loan instead of a personal loan. This way, you’ll receive the amount that you need to grow your business in the long term.
2. The Use of Funds
When applying for a personal loan, most lenders will want to see proof of income and that you can afford to repay it. Depending on how good your personal credit score this could help or hurt your loan application. However, the lender probably won’t care how you plan to use the money, which gives you flexibility on how to spend it.
In comparison, when you apply for a business loan, the lender will want to ensure it’s being used for business expenses. Loans for business expansion or purchasing new equipment shouldn’t be met with much resistance, but if the money is being used to pay off another loan or to make an unusual investment, then they might ask for more information. In addition, they may ask to see your debt to income ratio.
Still, many lenders realize that their customers need loans for different business purposes and will be happy to work with you to determine an amount that will fit your goals. For example, at Fora Financial, we don’t limit how our customers can spend their financing. We understand that every business is different, so we encourage our customers to utilize their loan how they see fit!
3. Required Application Documents
Before you apply for funding, it’s crucial that you understand how personal and business loans require different documentation. As referenced earlier, for a personal loan, all the lender will normally require is proof that the loan can be repaid.
However, prior to providing a business loan offer, it isn’t uncommon for the lender to request the following documents:
- A copy of your business plan
- Cash-flow reports
- Recent tax returns
- Your credit history
- Profit/loss statements
Most of these documents should be produced as standard, but for the loan application process to go smoothly, you should ensure that these documents are kept up-to-date.
In addition, the lender may ask for an analysis of your business’s industry. This will help them determine if you’re business will remain lucrative and assess how much risk it will be to provide you with financing.
4. Application Process Timeline
The final part of the loan application process that you’ll need to consider is how long it’ll take for the lender to provide you with a decision on your loan eligibility and then provide you with your financing amount.
The personal loan application process can move very quickly, with many online lenders offering instant decisions to their applicants. However, you should be wary of the interest rates and loan terms they apply. Still, a personal loan application can usually be turned approved quicker than a business loan.
Understandably, given the amount of information that business loan providers usually request, applying for a business loan takes longer. As larger amounts of money are usually involved, greater scrutiny is given and, in some situations, lenders may provide additional support to ensure the money is spent in the right way. This can prove hugely beneficial to new businesses that need financial advice as they grow their operations.
Still, there are many business lenders that aim to provide a fast and efficient process. At Fora Financial, we’re able to provide working capital to our customers within 72 hours from a business receiving their approval status. We know that business owners often can’t afford to wait for their funding, especially now as they navigate the COVID-19 crisis.
Another point to consider is that once the loan is issued, a personal loan provider may not require any further contact with you – unless your circumstances change. Whereas, with a business loan, the lender may request annual updates on the financial health of your business. Due to this, the length of the process is ongoing in a way.
Other Financing Options to Consider:
When pursuing additional financing, whether it be for your business or personal needs, it’s important to research and weigh all the available options. Below, we’ll list some of the other funding products that you should investigate:
- Line of Credit: With a line of credit, you’ll be approved for a certain amount of funds that you can borrow against. The line can be revolving or nonrevolving, and there are both personal and business lines of credit, depending on your needs.
- Credit Card: Most likely, you have at least one personal credit card in your name. While these can be beneficial, it’s important not to rack up too much credit card debt. This is also the case for business credit cards.
- Merchant Cash Advance: When you’re approved for a cash advance, you’ll receive lump sum funding in exchange for a percentage of your future credit card sales.
- SBA Loan: The Small Business Administration (SBA) provides loans to business owners that can’t qualify for funding through other mediums.
- Student Loan: If you need funding for schooling, you may qualify for a student loan. Often, these loans don’t require payments until after the recipient has graduated.
- Equipment Loan: Business owners that need to replace or repair equipment may benefit from equipment financing. It’s important to note that this loan can only be used for equipment costs and not on other business expenses.
- Inventory Financing: Similar to an equipment loan, inventory financing can only be used to purchase business inventory.
Conclusion: Consider Your Financing Needs
If you’re considering applying for a business or personal loan, then you should assess your business’s financial needs, time frame, and other requirements. There are many financial options out there, but it’s important that you choose the one that is the best fit for you!
Editor’s Note: This post was updated for accuracy and comprehensiveness in October 2020.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.