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Business loan vs personal loan: What’s the difference?

By May 13, 2019 No Comments
Two people brainstorming with a pad

Two people brainstorming with a padWhen you’re looking for financing for your business, you may be tempted to just get a personal loan instead of a business loan. But is that really the best choice? Are business loans really all that different from personal loans?

We’ve taken a look at the main differences between the two:

Personal loans

Personal use only

Firstly, a personal loan is intended primarily for personal use – just as the name would suggest. They’re supposed to help you pay for things like a new car, or a holiday, or to help you pay your household bills. They’re not really supposed to be used for business purposes.

Every lender will have their own terms and conditions, but most of them will specify that you should only use their personal loan for personal use.

If they find out that you’re using the loan for a business, they might call the loan in and demand that you pay it all back straight away.

You might be personally liable

If you do manage to find a lender who will let you use their personal loan for your business, you should make sure you find out who’s actually liable for the debt.

If your business is a limited company or a limited-liability partnership, any business loans you take out will be in the business’s name. This means the company is ultimately liable for the debt.

However, if you take out a personal loan, it will be you who will be liable for the repayments instead. The exception to this is if you’ve signed a personal guarantee.

You might not be able to borrow as much

A personal loan also might not be appropriate because the maximum amounts you can borrow are typically lower than with a business loan. Personal loans tend to only be available up to £25,000 whereas business loans typically go into the hundreds of thousands.

How much you need will depend on what you plan to use the loan for. If it’s only a small expense, a personal loan might be fine. But chances are you’ll need more than £25,000.

Business loans

They’re tailored for businesses

A business loan is the obvious choice for business finance. After all, they’re created specifically for business uses such as buying new stock, paying a VAT bill or relocating to new premises. They also typically work in a way that makes more sense for a business.

For example, there are a number of different financing products which have been created for specific business purposes, like invoice factoring.

Another benefit to business financing over a personal loan is the repayment structure. A good example is a merchant cash advance where you borrow a lump sum and pay it back as a percentage of your future card transactions.

This tends to be a great choice for businesses which are highly seasonal, with busy periods followed by quiet periods. There isn’t really an analogue when it comes to personal finance.

They can just as fast to arrange

One of the most commonly mentioned benefits of a personal loan over a business loan is the speed – business loans were traditionally very slow to arrange.

To some extent, this is down to the complexity involved in businesses and the number of factors a lender would need to take into account.

However, with the growth of alternative business finance, the process isn’t necessarily as slow any more. And in some cases, it can be just as fast as getting funding from a personal loan.

Many lenders, including Boost Capital, use technology and data to automatically approve applications within hours and days, rather than weeks.

You can build credit for your business

By taking out a loan in your company’s name, you’re helping to build credit for your business which will help you get more finance when you need it in the future.

Your business has a credit score which is independent of your personal score, and some lenders take it into account when you apply for finance.

Getting a loan for your business and paying it off on time will help to increase your credit score, and will serve as reassurance for future lenders that your business can be trusted with more finance as and when you need it.

Conclusion

As with choosing any financial product, it’s vital that you do your research before you make a commitment. Shopping around to find the right kind of finance for your business will help ensure you don’t run into problems further down the line.

Personal loans and business loans differ in important ways. Now you know some of the main differences, you should be in a better position to make an informed choice.

If you’d like to get a business loan, we can help. Apply today for a decision in seconds and funds in as little as two business days.

Dom Stapleton

Dom joined our marketing team last year. He has over 10 years of experience in SEO and social media, and also runs a (very) small business in his free time.

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Dom Stapleton

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