If you’re planning on starting or expanding a business, finding funding can be difficult. In fact, the Federal Reserve Bank of New York reported that 58% of new companies had challenges getting credit or money to help them grow.
If you’re in need of financing, you likely are considering a personal or business loan. But they work very differently. Find out what you need to know about personal loans versus business loans and how to decide which is right for you.
Personal loans vs. business loans
When it comes to paying for your company’s needs, it’s important to understand how each type of loan works so that you can select the right option for your business. Here’s what you need to know.
How personal loans work
With a personal loan, you work with a bank, credit union, or online lender to take out a loan. When deciding whether to approve your application, the lender looks at your credit history and income. Your business’ performance isn’t a factor.
Because personal loan lenders just consider your information, it’s often easier to get a personal loan than a business loan. You can quickly borrow as much as $100,000, and you have up to seven years to pay it back.
But if your credit isn’t stellar, you might not qualify for a low-interest personal loan. Instead, you could face high interest rates that cause your loan balance to balloon over time.
How business loans work
Business loans are very different than personal loans. To qualify for a business loan, you typically need to provide the lender with extensive documentation, including:
- A business plan
- A concrete spending plan for the borrowed money
- Individual and business tax returns
- Bank statements
- An annual report or statement of finances
The extra work can be worth it because business loans usually have high maximums. For example, you can borrow up to $5.5 million through a Small Business Administration (SBA) loan. Plus, you can have as long as 20 years to repay the loan.
Most business loan lenders require you to put up some form of collateral, such as your business’ assets. If you default on the loan, you can end up losing your business or other collateral.
3 times a personal loan is better than a business loan
Although a business loan allows you to borrow more and pay it back over a longer term, there are times when a personal loan makes more financial sense. Here are three occasions when a personal loan can be a better choice than a business loan.
1. Your business is brand new
If your business is relatively new or just starting, you might have problems finding a lender willing to work with you. Most business loan lenders only offer loans to companies that have been in operation for at least a few years — and even these lenders could have higher interest rates.
For example, lenders like Kabbage charge much higher interest rates and fees and have shorter repayment terms than if you qualified for an SBA loan or other traditional loans. For example, if you took out a 12-month loan for $30,000 from Kabbage and qualified for a fee rate of 5.00%, you’d repay a total of $40,800.
Those fees and charges can be steep. A personal loan can be a smart alternative. If you have good credit, you can get the money you need with a personal loan at a much lower rate.
2. You need money right away
Business loans can take weeks or even months to process since lenders have to review your business’ documentation, which takes time. If you need the money quickly, a business loan might not meet your needs.
If you need to act quickly to take advantage of an opportunity, to boost your inventory, or to hire new staff, you’ll likely need to find funding elsewhere. That’s when a personal loan can make more sense.
With many personal loans, you can receive your funds in just a few days, giving you the cash you need right away.
3. You don’t want to risk your collateral
Because most business loans require you to put up assets as collateral, there’s a good deal of risk associated with them.
If you don’t want to risk losing your collateral, a personal loan might be a better option. If you default on your payments, your credit can be damaged, and the lender can send you to collections, but you won’t lose your business or other valuables.
Applying for a personal loan
When thinking about personal loans versus business loans, it’s important to keep your business finances and goals in mind.
How quickly you need the money and how comfortable you are with risk will determine which option is best for you. In some cases, a low-interest personal loan can be exactly what you need to build a thriving business.
Get quotes from multiple personal loan lenders to ensure you get the best rate.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|6.26% – 14.87%1||$5,000 - $100,000||Visit SoFi|
|6.99% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|5.99% – 24.99%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|6.99% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|