Difference between individual loans and small business loans
Personal loans guaranteed by your personal credit history. This often makes them easier to obtain than a small business loan if you have a good credit history, which can be influenced by both personal and business credit ratings.
Both personal loans and small business loans come in different types, from mortgages and car loans to lines of credit and installment loans. Typically, retail loans are for personal purchases, while business loans are for financing business-related purchases.
What can a personal loan be used for?
Personal loans can usually be used for just about anything.
Although lenders may ask the reason for your application, in most cases you do not agree to spend your loan funds on anything specific when obtaining a personal loan. Some lenders do have restrictions on what their personal loans can be used for, so be sure to read the fine print before loan application…
Benefits of personal loans
Easier approval – It may be easier for you to get approval for a personal loan, especially if you have not been in business for a very long time.
Faster financing – Personal loans tend to require much less paperwork and paperwork, so the approval process is shorter and you get your funds faster.
Without collateral – The best personal loans are unsecured, which means that you do not need to post collateral to withdraw the loan. On the other hand, many business loans require you to put assets into collateral for loans, especially those with favorable interest rates.
Small business loans
What can a business loan be used for?
Business loans may have additional restrictions on what they can be used for, such as when you use the funds for business-related purchases. This can include upgrading technology and equipment, buying new inventory, paying rent for commercial space, hiring new employees, marketing your business, and even covering your day-to-day business expenses.
After all, your business loan should be used for purchases that generate additional income – ideally enough to offset the cost of interest. Some lenders will also allow you to use business loans to refinance or pay off your existing debt.
Benefits of small business loans
Separation of finance – It is very important to separate personal and business finances, and getting a business loan will help you with this. Not only will this save you a lot of time in the upcoming tax season, but it can also save you a lot of money in tax deductions.
Limitation of your liability – Depending on your legal structure and the type of business loan you take, your liability may be more limited than in the case of a personal loan in the event of default or non-payment.
Business construction loan – Getting a business loan instead of a personal loan will help you create a business loan and show future lenders that you can repay your business loans responsibly.
Large loan amounts – If you need a larger loan, you will want to consider business loans. Personal loans rarely exceed $ 50,000 and even that amount can be difficult to qualify for.
Lower interest rates – If you are eligible for the best business loans, you are likely to receive a lower interest rate than a personal loan. According to NavInterest rates on business loans from traditional lenders range from 2% to 13%, while interest rates on personal loans range from 6% to 36%.
Can I use a personal loan for business and vice versa?
You can usually use a personal loan to cover any business expenses. Keep in mind that you are still personally responsible for paying off this loan – not your own business – and splitting your finances this way can be more difficult.
On the other hand, some business loans may restrict you from using your funds for non-commercial expenses. Others are less restrictive and make it easier for you to pay your salary using your business loan.
How to get approval
The approval process for retail loans and small business loans is slightly different. In most cases, it will be easier to get a personal loan, while the small business loan application process will be longer and will require more extensive paperwork and documentation.
Getting Approval for Personal Loans
The personal loan approval process usually requires a good credit history and stable income. You will also need to show that you have a low enough debt-to-income ratio to shoulder the burden of the loan you are applying for. If you do not have a good credit history, consider taking secured loan, which requires a pledge form.
Personal loans are generally smaller than small business loans: Personal loans usually range in size from $ 1,000 to $ 50,000. Credit terms for traditional physical loans, it usually ranges from two to seven years.
Getting Approval for Small Business Loans
You will need excellent credit to qualify for a small business loan, and lenders may even want to see both your personal and business credit scores. You also need to be able to show adequate annual income, and most lenders will want to make sure that you have been in business for some time. There are some online lenders who offer more expensive business loans to people who have not been in business for a very long time or do not have good credit ratings.
Lenders will also need more paperwork for small business loans, including proof of your profitability and cash flow. You will need to specify exactly what the loan is for, and some lenders will also ask you to provide a business plan. Finally, you will need to provide them with information about your legal structure and documentation of any required business licenses and permits.
If you are eligible for a small business loan, getting approval for large loan amounts may be easier than with a personal loan. Many institutions offer small business loans ranging from $ 5,000 to $ 500,000, and some even offer loans worth over $ 1 million. Loan terms vary greatly and can range from six months to 25 years.
Choosing what suits you
Banks, credit unions, and online lenders offer both personal loans and business loans, and the Small Business Administration also offers government-backed small business loans. The choice between personal loans and small business loans and the choice of lenders to borrow depends on your business history, your credit, and your business goals.
If you have an established business and want the lowest prices …
Conventional business loans offered by banks and credit unions usually offer the lowest interest rates. These are ideal, but the application process is long and difficult to get approved. You will need a well-established business and excellent personal and business credit, and in most cases, you will need sufficient assets to provide collateral.
If you have a new or riskier business and want the lowest rates …
Small Business Administration (SBA) loans are a great option if you qualify. These are loans issued by the bank, but guaranteed by the state. In other words, the government agrees to repay 85% of the loan in the event of default.
Because of this, startups and riskier businesses that are not allowed to issue regular business loans can qualify for an SBA loan from a bank or credit union, and you generally do not have to provide collateral. You will continue to receive some of the lowest rates on the market. Keep in mind that this process is lengthy and can take weeks or even months.
If you have a new business and an excellent credit history …
People who are just starting out and have not been in business long enough to qualify for a business loan or SBA loan may want to consider getting a personal loan. They can be used for business purposes, and as long as you have excellent personal credit, you will still be eligible for fairly low rates. You may also consider funding your startup with Credit card with an initial annual interest rate of 0%, but make sure you can pay for it before the end of the promotion period.
If you need money quickly …
Online lenders tend to disburse funds faster than traditional banks, and some do offer small business loans. Personal loans are funded the fastest, with some online lenders offering same day approval and next day financing. Pay close attention to rates and conditions when it comes to online lenders. They can be fast, but many charge much higher interest rates, so the time you save may not pay off.
If you have bad credit …
Online lenders and alternative financing often provide loans for people with bad credit history… However, in order to protect themselves from the risk of lending to someone with a bad credit history, these lenders will charge incredibly high interest rates and may even require additional collateral. Options such as payday loans and home loans are some of the worst culprits and are extremely costly.
Small business loans can provide your business with the opportunity to finance growth at low rates and favorable terms. However, do not be discouraged if you are denied a business loan from a traditional bank. There are many alternatives, from personal loans to SBA loans and online lenders. Just be sure to do your research and choose low-cost funding options whenever possible.