Personal or business loan: Which one best suits your needs?

You have two options for financing your projects:

• Personal loans are granted to individuals. You can use this type of loan for personal purposes or to invest in your business.
• Business loans are granted to businesses. You can use this type of loan to launch a business, expand or make investments.

But how do you decide whether to get a personal or a business loan? Ganie-Hobbs, who has almost 15 years of experience lending to business owners, provides the following pros and cons to help you choose between a business and a personal loan.

3 pros of a personal loan

Paying lower fees

One big advantage of a personal loan is that it can be less costly than a business loan. “If you have a home equity line of credit already in place, it can be a cheaper way to borrow,” Ganie-Hobbs says.

Accessing funds more quickly

While getting a business loan is a lot faster than it used to be, if you have an existing relationship with a financial institution, a personal loan can be quicker to obtain. And if you have a personal line of credit, you can access your funds when you want.
 
“When you need money really quickly, like if you need to make payroll the next day, then it makes sense to use your personal line of credit,” Ganie-Hobbs says.

Improving your chances of getting a loan

If your business hasn’t brought in much income yet but you already have a good personal credit score, a personal loan might be easier to secure than a business loan.

3 cons of a personal loan

Being personally liable

“The main downside of the personal loan is that there’s no separation between your personal and business finances,” Ganie-Hobbs says. “If your business defaults on the loan, your personal credit will take a hit and you’re personally liable for the loan.” 

Bear in mind that business loans can also require personal collateral.

Not building commercial credit

Your business credit score is separate from your personal credit score. It’s based on reports from firms that do business with your company, such as suppliers and financial institutions, and isn’t influenced by your personal credit score.

“If you regularly use personal loans and lines of credit instead of business financing, you will limit your options down the line,” Ganie-Hobbs says.

Being unable to borrow as much

The amount you can borrow with a personal loan can sometimes be lower than for a business loan. The difference can be even greater if you have a poor credit score.

3 pros of a business loan

Building commercial credit

Taking out a business loan, a business line of credit or using company credit cards will help you build the financial credibility of your company. However, you need to use credit wisely and make your payments on time.

“It’s a lot easier for your bank to lend to you in the future if your business has a record of paying back its debt,” Ganie-Hobbs says.

A better commercial credit score can help you:

• Improve your borrowing conditions
• Increase your financing limits
• Get additional credit from suppliers

Benefitting from tax deductions

The fees, penalties and interest you pay on business loans are deductible expenses when filing your taxes. For example, you can deduct these amounts when you borrow funds for business operations or purchase a building for business purposes.

Being able to take out larger loans

The lending limits for business loans can often be much higher than for personal loans. However, the actual amount will depend on your business income and the collateral you’re offering.

3 cons of a business loan

Having to incorporate

In most cases, your company needs to be incorporated to qualify for a business loan. However, some lenders, such as BDC, can provide loans to sole proprietors.

Contending with longer approval times

Getting approved for a large business loan can sometimes take a long time. “Small business loans can take as little as a few days to arrange,” says Ganie-Hobbs. “But bigger loans can take several weeks.”

Encountering difficulties getting a loan

Start-ups can find it hard to get a business loan if they haven’t generated much revenue. However, entrepreneurs with a solid business plan can apply for a start-up loan. Other options for start-ups include organizations such as Futurpreneur, VC financing or a business credit card.

Which is best for your business?

Ganie-Hobbs says that unless you don’t qualify for a business loan or need the money extremely quickly, a business loan is generally the best option.

“When you’re serious about growing your company and building your reputation with lenders, you need to prove you can qualify for and manage business loans,” she says.

Anticipate your needs

Business owners should also discuss credit with their lender sooner rather than later.  

“Don’t wait too long before you start building business credit relationships,” Ganie-Hobbs says. “Make sure you look at your cash flow projections and that credit will be available when you need it.”

“The best time to discuss credit needs is early, before you’re pressed for cash.”

In a nutshell: Differences between a personal loan and a business loan

Here’s an overview of the main differences between these two types of loans:

Next step for getting a business loan

Learn how to prepare your application by downloading BDC’s guide for business owners: How to Get a Business Loan.