Business Loans Vs Personal Loans

Before comparing business and personal loans, it’s important to define and understand what these types of loans are used for.  We will start by defining a business loan.

• What is a business loan?
• What Could You Use A Business Loan For?
• What Is A Personal Loan?
• Personal Loan Vs Business Loans: Timescales
• Personal Loan Vs Business Loans: Start-Ups
• Personal Loan Vs Business Loans: Options
• Choosing your loan

What Is A Business Loan?

A business loan is designed to be lent to a business, rather than to an individual. With a business loan, you can generally borrow far larger amounts than is possible with a personal loan. Depending on the size of your business, the industry that you operate within, your profitability, and the age of the business (this is not an exhaustive list – other factors are considered by lenders). You can usually borrow between £5,000 and £5 million. Loan repayment durations are also variable and start at 1-3 months, similar to the term of a short term loan, and rise to a maximum of 15-20 years.

Business loans come in many shapes and sizes and are incredibly varied. They are however generally grouped into two distinct categories.

Unsecured Loans: You borrow the loan amount without offering up an asset as security, such as your business. This is considered of greater risk to the lender, and lesser risk to the borrower.

Secured Loans: You borrow the loan amount and offer up an asset as security and this minimises the risk to the lender. If your business does end up defaulting on your loan then the lender could be able to repossess assets to recoup their money.

What Could You Use A Business Loan For?

When you apply for a business loan you may need to provide the lender with a detailed breakdown of everything you intend to spend the loan on.

Businesses will generally spend their business loan on:

• New stock or assets that will enable them to create more stock
• Paying off or consolidating debts
• Hiring new staff members to help them cope with an increased demand
• An office move or an office upscale
• New equipment, new technology or software
• Operational expansions

So now that we have seen what a business loan is and does, we will next define personal loans.

What Is A Personal Loan?

Just as a business loan is a loan that is designed to be lent to and subsequently used by businesses, a personal loan is designed to be used and lent for personal uses. This means it is provided to an individual, rather than a business. Personal loans are offered by most major banks and lenders. Generally, personal loans are paid off in monthly instalments by the individual, over a fixed term, from 1 year up to 10 years (this figure can vary from lender to lender). The amounts that you can borrow also vary but the maximum limit is nowhere near as high as you can borrow with a business loan. The majority of personal loans are unsecured.

People can use personal loans for a wide range of things and borrowers normally don’t have to provide a spending breakdown as is the case with a business loan. Although you don’t have to provide a detailed breakdown, many lenders ask what the loan is for.

The following are examples of things that individuals can and do spend personal loans on:

• Home improvements, such as a new driveway, an extension, a conservatory or a new kitchen
• A new car or a new vehicle
• Debt consolidation, including credit card debt consolidation

Generally speaking, if you need a loan for personal reasons, such as those outlined above, then you would choose a personal loan. If your business needs a loan, or if you need a loan for business purposes then you would choose a business loan. However, it is not always as clear cut as it may seem and sometimes there can be overlaps. In the following section, we will be comparing the two loans using certain categories as metrics.

Personal Loan Vs Business Loans: Timescales

As mentioned above, the information that is required for a personal loan application can be far less than is the case with a business loan, and far less assessment might take place on behalf of the lender. Furthermore, with a personal loan, you might not need to provide a breakdown of your intended usage of the loan. This means that you could have the money that you need faster with a personal loan. A direct lender will look at your credit score and history, to assess if you can make repayments on your personal loan. A business loan can take weeks to be approved or denied. It is worth noting that in some instances a personal loan can also take a long time to be approved or denied.

Personal Loan Vs Business Loans: Start-Ups

It is a shame that start-ups, even those with good prospects and a stellar business model or plan in place can run into difficulty when it comes to accessing finance options (especially business loans with more favourable terms). When it comes to using a personal loan to fund a business, some lenders can stipulate that their personal loans should not be used for business purposes, so it is key that business owners read the terms or check with the lender before applying for a personal loan. If the lender does allow a business to use a personal loan it’s important to note that the business owner is liable for the repayments, whether the business can or cannot make repayments.

If you as a business owner are struggling to secure yourself a business loan then there are other ways that you might source the money that you need:

• Approaching lenders that specialise in providing business loans/finance to start-ups
• Crowdfunding
• Loans from family and/or friends
• Government start-up schemes and loans

(Please see below for further information on this subject).

Personal Loan Vs Business Loans: Options

With a personal loan, you are borrowing the money from the lender and repaying this amount over a pre-agreed period, inclusive of interest. With business loans, you have a varied range of options, for example:

Credit facilities (revolving): this will allow you to borrow money for your business as and when the need comes up. The interest your business pays is directly related to the amount borrowed and with revolving credit facilities the business pays back the amount in full when it can.

Working capital: working capital lets you borrow money for everyday business costs such as paying employee wages.

Government start-up loans and grants: these types of schemes are specifically for new businesses and start-ups. It may be useful to research government start-up loans and investment opportunities as they can provide you with an investment of cash. If you are starting up a business, you can borrow a pre-determined figure and pay it back over a period, usually with more favourable terms for new businesses.

Bank loans: this loan type allows a business to secure a lump sum cash injection, paying it back over an agreed period. With a bank loan for businesses, many banks will ask for a director’s guarantee which means the company’s directors are responsible for the debt should the business be unable to pay it back.

Peer to peer: mostly offered via specialised platforms that connect investors to businesses. Used by the former to make a positive return on their investment. A director’s guarantee may apply.

Short term business loan: usually a quicker application process, this type of loan allows you to borrow money to finance your business over a shorter period (normally up to 12 months). These types of loans can come with high-interest rates.

Equipment finance: this type of finance allows you to borrow money to buy specialised industry equipment.

Asset-backed: this type of business loan allows you to offer up an asset as security against your borrowing. With asset-backed business loans, you can borrow larger amounts and can use things such as business equipment, land and stock as security. However, if you are unable to pay back your loan then you might lose that asset that you had used as security.

Choosing Your Loan

When it comes to choosing the best loan for your needs, It’s important to know the differences between personal loans and business loans as this should help you in choosing the right loan for you or your business. We would suggest that you always research and compare loan options available to you and make use of the information at your disposal. Don’t rush into an agreement, or into signing anything. You should be upfront and honest with your chosen lender and always check and understand the terms and conditions before applying.