Borrowing money has become easier for both individual consumers and businesses in need of funding, thanks in part to the advancements in technology combined with a low interest rate environment. Even so, there are clear differences between personal loans and business loans that borrowers on both sides of the coin should understand when considering which to use for their financing needs. Business loans and personal loans vary in the number of options available to borrowers, how applications are evaluated, and the terms of repayment.
A Variety of Options
Nearly all financial institutions, including banks, credit unions, and online lenders, offer some variation of a loan for personal use, business use, or both. There are also alternative lenders that offer different loan options, but these are typically limited to either personal loans or business loans, not solutions for both. For example, a local title loan company provides a secured loan based on the value of a borrower’s vehicle, but the loan funds are intended for personal, not business use. Other providers, like merchant advance companies and accounts receivable lenders are solely focused on the business market. While there are a handful of options for each type of loan, borrowers need to be aware of the specialty in which their preferred lender works to ensure they qualify.
Both personal loans and business loans require some degree of underwriting, meaning the lender must determine how qualified a borrower is based on his or her credit history, ability to repay the loan, and other debt obligations owed each month. For personal loan lenders, an application may ask for details about an individual’s employment, housing circumstances (i.e. rent or own), and purpose for the loan proceeds. So long as the borrower has a strong credit history and steady income, a lender is inclined to approve the loan request.
Business loans require far more evaluation than a personal loan, given that the amount is often much higher, putting the lender at greater risk. Businesses applying for a business loan may need to provide tax returns for the company and the owner, financial statements that show current account balances, the repayment terms of other business loans, and in some cases, a business plan. Business borrowers may also be required to provide collateral to secure the loan, such as equipment, inventory, or accounts receivable.
Loan Terms and Restrictions
Most personal loans are offered up to a maximum of $35,000, although some go as high as $100,000, and repayment terms range from one to five years. Most business loans, on the other hand, do not have a maximum funding amount, and repayment can be extended as much as 20 years for the largest loans. Both personal and business loans provide predictability to borrowers in that the payment due, generally on a monthly basis, is the same for the life of the loan. Interest rates are also fixed for business and personal loans, although any type of loan that is secured by collateral has the potential to have a lower interest rate than a loan that is unsecured. Personal loans have few restrictions as to what the funds can be used for; business loans, however, may be restricted based on the original intent of the loan, like an inventory or equipment purchase.
Both business loans and personal loans can be a smart, affordable way to access funding in your time of need, but there are differences you should consider before selecting one option over the other. Personal loans are in far smaller amounts and may have shorter repayment terms than business loans, but the approval rate for business loans is significantly lower. With either choice, borrowers should shop around for financing options with various lenders to determine the best route for borrowing money.