Business Loan vs. Personal Loan: How They Are Different
Prior to doing this, you’ll need to know what the differences are between the 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.
Considering a Business or Personal Loan? Here’s What You Need to Know:
1. The Loan Amounts
One of the first differences you’ll notice when comparing personal and business loans is the amounts that you can apply for. Generally, personal loans tend to be for smaller amounts, and they are usually ‘unsecured.’
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 collateral. However, there are lenders who take this into consideration and are willing to lend to new businesses.
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.
If you’re a small business owner and need of a certain amount of money for your operations, it may be more beneficial to apply for a business loan instead of a personal loan. This way, you’ll have the amount that you need to grow your business.
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 your personal credit score this could be a good or bad thing. The lender usually isn’t interested in seeing evidence of what you’ll use the money for, which does give you flexibility on how the money is spent.
In comparison, when you apply for a business loan, the lender will want to ensure it’s being used for business purposes. 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.
Still, many lenders realize that their customers will need loans for different reasons and will be happy to work with you to determine an amount that will fit your business’s goals.
3. Required Application Documents
Before you apply, 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, with a business loan, it isn’t uncommon for the lender to request a copy of your business plan, cash-flow reports, credit history, profit/loss statements and in some situations, an analysis of the industry that your business operates in. 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.
4. Application Process Timeline
The final part of the loan application process that you’ll need to consider is the actual length of time between applying and receiving the money.
The personal loan application process can move very quickly, with many online lenders offering instant decisions. However, you should be wary of the interest rates and terms they apply. Still normally speaking, a personal loan application can be turned around quicker than a business loan.
Understandably, given the amount of information that a business loan provider requests, 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 and business guidance to ensure the money is spent in the right way. This can prove hugely beneficial to new businesses.
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.
Another point to consider is that once the loan has been issued, with a personal loan the lender 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, so 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
- Credit Card
- Merchant Cash Advance
- SBA Loan
- Student Loan
- Equipment Loan
- Inventory Financing
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 2019.
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.