Key Takeaways
- Personal loans can be faster and easier to get, but the debt is tied to your personal finances. This means your personal credit and assets are on the line.
- Business loans may take more time and paperwork upfront but offer larger amounts, longer repayment terms, and help you build business credit.
- Your business stage is critical when deciding between the two. Early-stage businesses often start with personal loans, while growing businesses with revenue history benefit from business loans.
You need money for your business, and you're staring at two very different paths forward. Both business and personal loans can get you funded, but not choosing the ideal option could complicate your finances in ways you didn't see coming.
Here's how to figure out which type of loan fits where your business is right now—and where you want it to go.
What's the difference between a personal loan and a business loan?
A personal loan is money borrowed by you as an individual, based on your personal credit score and income. You're personally responsible for paying it back, and the debt follows you regardless of what happens with your business.
On the other hand, a business loan is money borrowed by your business entity based on your business's financial performance and credit history. The business as an entity is responsible for repayment, which helps keep your personal and business finances separate as you grow. (Most business loans require personal guarantees from the owners)
How they work and what you can use them for
Personal loans: Flexible and fast funding
Personal loans are typically unsecured. In other words, you may not need to put up collateral to get approved. Lenders are mainly looking at your personal credit score and income, which is why so many early-stage business owners start here. The application is faster and simpler, and you can often get funds within days rather than weeks.
You're free to use the money however you need—no explanations or justifications required. That flexibility matters when you're moving fast or your needs don't fit neatly into traditional business loan categories.
The downside is that most personal loans are on the smaller side, and interest rates are at the top end, especially if your credit score isn't in great shape.
Importantly, as it's a personal loan, it won't help you build business credit, which becomes important as your business grows and needs larger amounts of money.
Business loans: Built for business growth
Business loans are built specifically for business growth: buying inventory, expanding locations, covering payroll during slow seasons, purchasing equipment, and more. Lenders will need to know exactly how you'll use the money and how it will help your business generate revenue to pay them back.
With a business loan, you’re able to qualify for larger amounts (millions of dollars if ever needed) and longer repayment terms that let your business generate the revenue to pay the money back.
Business loan applications may take a little longer because lenders need proof your business can handle the debt. They’ll ask for revenue documentation, cash flow statements, a clear plan for how you'll use the funds, and sometimes a formal business plan and collateral.
We know what you’re thinking: business loans sound like a lot of work upfront. However, the payoff is worth it because you're building business credit separate from your personal credit, which opens doors as your business grows. You are also getting your business the funding it needs to achieve your growth plans, rather than taking on debt that is not enough to help your business meet its needs due to the personal loan limit amounts cap and higher interest rates.
Breaking down the key differences
The differences between personal and business loans go deeper than just who's signing the paperwork. Understanding these differences helps you make a smarter choice about which path fits your business right now. Let's walk through what sets them apart.
- Credit requirements: Business loans look at your business credit in addition to personal credit. Personal loans rely on your individual credit score.
- Application complexity: Business loans require additional documentation: tax returns, profit statements, bank statements, and detailed explanations of fund usage. Personal loans usually require less paperwork.
- Business plan: Business lenders typically want to see a business plan and financial projections, especially for newer businesses or larger amounts. Personal loans skip this and focus on your personal finances.
- Collateral: Business loans may require collateral like equipment, vehicles, or property. Personal loans are usually unsecured,
- Repayment timeline: Business loans stretch over several years to match business growth cycles. Personal loans have shorter terms (months to a few years), meaning higher monthly payments.
- Legal structure: Business loans go to registered businesses (LLCs, corporations, sole proprietorships). Personal loans go to you as an individual, regardless of business ownership.
The bottom line: Your business stage matters
Personal loans work best when you're just starting out and haven't established business credit yet, you need funds quickly without waiting through a potentially longer approval process, or your financing needs are under $50,000. Think of them as a practical bridge in the early days while you're building the business credit history that unlocks better options later.
Business loans become the better choice once you've got some revenue history under your belt. Maybe you've been in business for a year or two, you're generating consistent sales, and you need larger amounts of capital for specific growth initiatives like purchasing property, buying major equipment, or funding significant expansion.
Business loans are ideal when you want to keep your personal and business finances separate, build business credit for future opportunities, and benefit from lower interest rates and longer repayment terms that align with how businesses actually generate revenue over time.
Still thinking through your options?
These questions come up in just about every conversation we have with business owners weighing their choices:
- Can I use a personal loan for my business? Absolutely, but understand what you're signing up for. You're personally liable for repayment even if your business struggles or fails, and it won't help you build the business credit you'll eventually need for larger opportunities.
- Which one has lower interest rates? Established businesses with solid financials usually get lower rates on business loans. Personal loans often cost more.
- Can I switch from a personal loan to a business loan later? Not directly, but once your business is established with revenue and credit history, you can apply for a business loan
- Are there tax benefits to consider? If you use a business loan for IRS allowed business expenses, the interest might be tax-deductible. But the rules get complicated quickly, so it's worth talking to a tax professional about your specific situation before assuming anything.
Ready to figure out your best option?
Every business is different, which means there's no universal answer to the business loan versus personal loan question. What matters most is borrowing responsibly, making your payments on time, and building strong credit for both you individually and your business. That foundation opens doors to bigger opportunities as your business grows.
Still wondering which type of loan makes sense for where your business is right now? Let's talk it through. We're happy to walk through your specific situation and help you figure out the best path forward.
