Business Loan vs. Personal Loan: Which Is Best?

Many organizations and individuals depend on loans to gain immediate funding for their businesses or personal needs. Whether it is a company suffering from a financial crunch or an entrepreneur in the need of capital investment to start a new business, determining the suitable type of loan option will depend on the specific financial requirements.

An existing business considering onshore vs offshore options or a new business looking to acquire capital to start the business, both need to focus on the potential pros and cons of all types of loans available to them before making the final choice.

What Is a Business Loan?

A business loan is used for business purposes. It can be utilized to fund a startup, for paying salaries, for expanding business infrastructure, or any such business requirements that need funding. It is not simple to acquire a business loan as it has strict eligibility criteria. Furthermore, business loans can either be secured or unsecured depending on the circumstances of the company.

Advantages of a Business Loan

Business loans have the following advantages:

• They offer tax benefits
• They have lower interest rates
• They help to create and maintain business credit
• They offer larger loan amounts
• There are multiple business loan options such as term business loans, standard business loans, and others

Disadvantages of a Business Loan

Business loans have the following disadvantages:

• They are difficult to obtain
• They may require a personal guarantee

What Is a Personal Loan?

As the name depicts, it is a type of funding available to individuals for personal needs. It is typically a fixed amount that is lent at a fixed interest rate over a predetermined time period. These loans are usually lent as unsecured loans in which an individual borrows an amount of cash from a lender and commits to paying it back over a mutually agreed time period through fixed monthly deposits. Moreover, these loans are known as unsecured loans as they are not secured against an asset owned by the individual.

Advantages of a Personal Loan

Personal loans have the following advantages:

• They are easy to acquire
• They are usually unsecured

Disadvantages of a Personal Loan

Personal loans have the following disadvantages:

• They have lower capital limits
• Individuals are personally liable
• They have higher interest rates than business loans

Personal Loans vs. Business Loans – A Comparison

Here are some differentiating factors of both loans.

Loan Purpose

Where business loans are used to fund only business-related expenses including stocking up on inventory, supplies, paying wages to employees and vendors, etc. personal loans can be used for financing business expenses as well as individual lifestyle expenses such as the purchase of a new house or car.

Tax Deductions

Depending on the tax policies of a state, interest on business loans is tax deductible whereas personal loans carry no tax benefits.

Loan Term

Where business loans have a more relaxed loan repayment period, personal loans need to be repaid much more quickly.

Loan Amount

The loan amount for business loans is much larger than the personal loan amount.

Collateral Requirements

Mostly, business loans are secured with collateral whereas personal loans do not require collateral.

Ease of Application

The loan application and disbursal procedure for personal loans are comparatively fast. Business loans take a lot of time to process as a lot of paperwork and due diligence are involved before approving and disbursing the loan amount.

Interest Rates

Interest rates on personal loans are much higher than on business loans as personal loans are offered to meet individual needs such as property purchases, house renovations, hospital bills, or other personal cash needs. Such loans are unsecured thus the higher interest rates. On the contrary, business loans have lower interest rates as they are secured and a business pledges collateral as a security for this type of loan.

Eligibility Criteria

Before disbursing personal loans, a financial institution observes the debt-to-income ratio and the credit score of the concerned individual. However, in the case of business loans, the lenders analyze the personal as well as business credit ranking to evaluate whether the company deserves the funding or not. Additionally, companies need to provide heaps of documentation to satisfy lenders so they approve their business loans. 

Which Is Better; A Business Loan or a Personal Loan?

The comparison in this article can assist in decision-making on the appropriate type of loan when there is a need for financial assistance. The decision can be based on the urgency and the ease of acquiring a loan. For instance, if the required funding is not a significant amount but is urgently required, go for a personal loan. However, if the need is a huge sum of money and the company needs a long term to pay back the loan, a business loan would be more suitable.