When looking for a loan, you need to know the best options available. Some are a quick way to get the additional cash you need to expand your business. The common options available in the market are business loans and personal loans. They are worth considering because each can serve you in a good way, depending on what you need. You should know what business loans and personal loans are meant for along with their qualification criteria. Besides, you should also seek to know how it will impact your credit score. So, what are the differences between personal loans and business loans?
A personal loan is mostly guaranteed by your credit rating. They are easy to get compared to a business loan. As long as you a good credit score, you will be considered for a business and personal loan. They come in different ranges and can be a mortgage or an auto loan.
A personal loan allows you to make any purchase that you want or even pay off a debt. Business loans are strictly meant to fund purchases of a business.
How Is Personal Loan Used?
A personal loan can be used for almost anything. Lenders will ask you how you plan to use it but do not follow up to make sure you do as stated. This does not apply in every case; some are strict and will insist that the personal loan pays whatever it was meant for. This includes things such as tuition or paying off a loan.
How Is Business Loan Used?
Business loans are restricted and not as flexible as personal loans. They are meant for business purchases. Some of the things you can pay for with the loan include buying equipment or upgrading technology systems. It can also be to pay rent for your business premises, hire new staff, market the business, or cover any other business expenses. However, a business loan can also be used to pay off a debt or refinance a mortgage.
Why a Personal Loan Is Handier Than a Business Loan?
It is possible to use a personal loan to pay for your business expenses. This type of loan is flexible, and you can spend it as you wish. However, your business will not be liable to repay the money.
However, if you borrow a business loan, you cannot use it for personal needs away from your business. But, if it’s not very strict, you can give yourself a form of salary through your business and spend part of the loan on personal matters.
Approval of a Personal Loan versus a Business Loan
The approval of these two loans is different. A personal loan is easier to get approved for than a business loan. The application of a business loan is lengthy and requires a lot of paperwork, which means it’s harder to qualify for one than a personal loan.
How to Get Approved for a Personal Loan versus a Business Loan
The process of getting approved for a personal loan is based on your credit rating along with your income. Besides, you must have a low debt-to-income ratio. This is to make sure that a new loan does not increase the debt burden to pay every month. If your credit is not good, you can go for a secured loan where you have to provide collateral. The other option would be going to lenders like payday loan service providers, which may mean paying high-interest rates.
A personal loan does not approve massive amounts of money like business loans. Most of them range between $1,000 and $50,000. Loan term loans usually are between two years and seven years.
How to Get Approved for a Business Loan
When looking for a Fast Cash Loan for your business, your personal credit is essential, but you must also have a good business credit rating. Some lenders will give you a business loan if your business credit score is not good, but with high-interest rates.
A lot of paperwork is needed to show the cash flow and profit margins of the business. Besides, you must produce showing your business is running legally along with your business plans. The lender will not risk if your business is not well established or doesn’t have a well-defined plan.
However, if you are initially approved for a small business loan, your chance for qualifying for a business loan in future increases. Business loans mostly range from $5,000 and $500,000 but can go up to $1 million. The loans’ term can as long as 25 years, depending on the amount lent.
Pros of a Business Loan
- A business loan helps you separate your personal and business finances. It saves time during tax filing while saving you money in tax deductions.
- It limits your liability depending on the legal structure of your business. Your liability is more limited with this type of loan, unlike with a personal loan in case of a default.
- It helps you build your business credit, and you can show lenders in the future for quick approval of a loan. But it will only help you if you repay your loan responsibly.
- A business loan helps you access significant amounts of money. This is different from personal loans, which hardly go beyond $50,000.
Pros of a personal loan
- A personal loan is quickly approved, and you do not need to be in business. It is for personal use, and all you need is a good credit rating.
- Due to less paperwork, you get the money within a short time. You can get the money quickly and take care of the financial problem.
- Personal loans can be unsecured and therefore, you can access one without going through the trouble of finding collateral. Most business loans will ask for security in addition to the long loan application process.
The Bottom Line
Both personal loans and business loans are a great way to get additional financing. Though they are different, their suitability depends on your needs; choose what suits you best. Drawing the line between them will help you make the right decision in case you need funds.