December 5, 2022 | Last Updated on: September 25, 2024
When looking to fund a small business, small business loans might be what most business owners think. But in this article, we’ll compare business loans vs. personal loans and uncover some benefits of both types of loans that you might not know.
Depending on several factors, one might fit you better than another. As you’ll see throughout this article, there are several variables that can impact your small business if you opt for a personal or business loan offer. Learn all you need to know about business loans and personal loans, as well as:
And much more along the way. After reading this article, you’ll have all the information you need to make the best-calculated decision for your small business.
You obtain a personal loan by evaluating your personal credit score, and the eligibility factors are typically more relaxed. Most often than not, a positive credit score is enough for lenders to approve the loan — even for a small business owner.
Personal loans can come in an array of forms — from auto loans to land loans. Putting it simply: they come in any program that you could use for personal use. A factor you must take into account as the loan amount won’t be too substantial.
Business loans tend to be a lot more restrictive in the way to use your loan amount, all lenders will demand a reason for the loan request, and it must be for business reasons. To summarize, you can only use your loan in ways that will generate revenue for your small business. That’s not guaranteed, of course, but lenders will only pass your loan request if they see a high probability of that happening.
A business owner has access to several small business loan programs — as you’ll see a few later in this article. Small business loans also have a longer and more difficult application process. But they can provide your small business with a higher amount of capital.
The traditional use of personal loans tends to be for personal reasons, but there’s no reason you can’t use them for your small business. Although the lender might ask for a reason, they don’t use it as an eligibility factor to process your loan request. Although, you should read your loan contract carefully, as some personal lenders do, and use it as an eligibility factor.
Small business loans are a lot more strict. There’s a very lengthy eligibility process that looks at many factors that can approve your loan application. Factors like business credit, personal credit, financial history, cash flow, business industry, time in business, and more. You have to present a business plan to the lender and explain how you’ll use the loan amount for your small business.
It’s important for you to know what lenders expect from their borrowers, as it increases the possibility of seeing your loan request go through. As such, small business owners need to fill in the shoes of their lenders and what they expect from their loan offerings. Let’s look at each of those cases:
As you saw throughout this article, small business loans can offer you some of the best conditions to improve your small business, expand it, and buy equipment, among other needs it might require. But you also saw that the application process is thorough and challenging. Most lenders require a set piece of eligibility standards that business owners must have for loan approval.
Small business loans have a lengthy and strict loan application process. Lenders prefer to lend to established businesses with solid business purposes, business expense reports, and cash flow. But also with good credit — business credit and personal credit — and more deciding factors.
Traditional lenders require that borrowers have solid eligibility factors, and present a business plan explaining the business purposes of the loan term. On the other hand, if you need business funding and don’t have these requirements, you can also apply for alternative lenders such as online lenders. These lenders can still offer you competitive loan interest rates — like Biz2Credit.
Personal loans are easier to apply for — lenders usually require good credit from the borrower — personal finances and income statements, a debt-to-income ratio (DTI) no higher than 40%, and other basic verification documents. But on a higher personal loan amount, your lender might deem it to be a secured loan, for which you’ll have to provide collateral or a personal guarantee.
If that situation develops, it might be better for you to look for other financing options — in this case, a small business loan. Although it’s a lengthier and more difficult application process, you can minimize it by providing collateral to corroborate your request and have access to more capital.
A business line of credit allows a business owner to have a lump sum of cash in their business bank account — which can go up to $100.000 for unsecured lines of credit or more for secured ones —and only pay interest on what they end up using. A great and fast option for those unpredicted financial holes, but you must be careful with some lenders’ interest rates as they can be substantial.
On the other hand, a personal revolving line of credit is similar to a business line of credit, as it allows you to borrow money up to a credit limit, but you’ll have a due payment every month, although you can opt to pay in full.
Business credit cards vs. personal credit cards are also very similar — save for a few exceptions. Business credit cards tend to have a higher credit roof and can offer discounts on business-related options such as small equipment financing, office/ industrial supplies, advertising, phone bills, etc.
Personal credit cards have a smaller credit offer and have bonuses in personal options such as clothing brands, traveling, restaurants, etc.
When choosing a loan term between a business loan vs. personal loan secured and an unsecured option, any small business owner will have a myriad of choices, lender and loan term alike. The best option is what you deem best for your small business.
Although personal loans are faster and easier to acquire, they tend to offer a smaller credit option than small business loans. That, in conjunction with a secured option, can help you facilitate the application process for a business loan, and can help you refinance it later. Even if you don’t have a solid business credit score, you can opt for alternative lenders, which leads us to our next topic:
Even with bad credit, there are other loan products outside financial institutions that a small business owner can go after. Alternative lenders offer you business loan options that have an easier qualifying process — even if your personal credit history or business credit history isn’t the best.
And as such, you can always reach out to Biz2Credit and apply for a loan term that can make a difference in your small business. Not only will you qualify without overly restrictive eligibility factors, but you’ll also get funding fast and improve your business credit score. And when traditional institutions and credit unions tighten loan requests due to an economic downturn, this can prove decisive for your small business.
So, if you need funding, don’t hesitate and contact us today! Do the same as Loveleen, owner of Simply Beautiful Medspa, that thanks to Biz2Credit, in her own words: “helped us get the financing we needed to make our vision a reality.” If you need to do the same, don’t hesitate! Contact our small business funding expert and find the best funding option for your small business!
