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Business Loan vs. Personal Loan: Which One Is Right for You?
April 26, 2022
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Business Loan vs. Personal Loan: Which One Is Right for You?

All small business loans are essentially the same, right? In principle, this is true, but you may struggle to decide if you should apply for a business or personal loan.

Before doing this, you’ll need to know the differences between these two financing processes.

In this blog post, we’ll explain how these types of loans differ so you can select the right funding option.

Personal Loans vs. Business Loans: How Do They Differ?

1. The Loan Amounts

When comparing personal and business loans, one of the most significant differences is the range of financing amounts.

Generally, personal loans tend to come in smaller amounts, usually ‘unsecured.’ Therefore, you won’t need to put up collateral to qualify for a personal loan. Not submitting collateral is beneficial because you won’t lose this expensive collateral if you can’t repay your loan.

In comparison, business loans typically have a higher loan amount range, and the lender can issue it on a ‘secured’ basis.

Therefore, you may need to submit collateral or a guarantee to secure the loan. If you cannot repay the business lender, they can collect the collateral to compensate for any damages.

Because start-up businesses typically don’t have significant business collateral, it can be difficult for them to obtain funding. However, some lenders consider this and are willing to lend to new businesses. This shouldn’t be an issue if you own an established business, as you likely have assets to provide if necessary.

In addition, other lenders 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 the necessary funding for your business.

Suppose you’re a small business owner and need a certain amount of money to maintain your operations. In that case, it may be more beneficial to apply for a business loan instead of a personal loan. This way, you’ll receive the business loan 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. Depending on how good your personal credit score is, this could help or hurt your loan application. However, the lender probably won’t care how you use the money, giving you flexibility on how to spend it.

In comparison, to qualify for a business loan, the lender will confirm that the loan funds are for business expenses.

For example, loans for business expansion or equipment shouldn’t be met with much resistance from a lender. Still, if you want funding to pay off another loan or make an unusual investment, 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 work with you to determine an amount that fits 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 funds how they see fit!

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3. Required Loan Application Documents

Before you apply for funding, it’s crucial that you understand how personal and business loans require additional documentation.

All the lender will typically require for a personal loan is proof that the loan recipient can repay the loan. However, before providing a business loan offer, it isn’t uncommon for the business financing lender to request the following documents:

  • A copy of your business plan
  • Cash-flow reports
  • Recent tax returns
  • Your credit history (to determine if you have a strong business credit score)
  • Profit/loss statements

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. Then, once you receive your qualification status, you’ll need to determine how long it will take to receive financing.

The personal loan application process can move quickly, with many online lenders offering instant decisions to their applicants. However, you should be wary of the interest rates and loan terms. Still, a personal loan application can usually be 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. 

Still, many business lenders aim to provide a fast and efficient process. At Fora Financial, we can provide working capital to our customers within 72 hours from a business receiving their approval status.

In addition, once the loan is issued, a personal loan provider may not require any further contact with you. 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.

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Other Financing Options to Consider:

When pursuing additional financing for your business or personal needs, it’s essential 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 receive 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: You most likely have at least one personal credit card in your name. While these can be beneficial, it’s essential not to rack up too much credit card debt. This is also the case for business credit cards; racking up too much debt can hurt your credit score and be challenging to pay off.
  • Merchant Cash Advance: If you qualify 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 be eligible 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 business owners can only use this loan for equipment costs and not other business expenses.
  • Inventory Financing: Like an equipment loan, loan recipients must spend inventory financing on business inventory.

Conclusion: Consider Your Financing Needs

If you’re considering applying for a business or personal loan, you should assess your business’s financial needs. There are many financial options out there, but it’s crucial to select the right one for you!

Editor’s Note: This post was updated for accuracy and comprehensiveness in April 2022.

Fora Financial

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.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].