Should I Fund My Business With a Business Loan, or a Personal Loan?

By Ben Luthi on April 30, 2018

So you’ve got a business idea. You have a plan to make it happen. Now you just need some  money to get it off the ground.

Two of the best ways to get capital are through small business loans and personal loans. Depending on what stage your business is in and your credit situation, one could be better than the other.

Here are the pros and cons of each so you can make the best decision for your business.

Accounting 101: Set Your Finances up the Right Way

Learn the fundamentals of small business accounting, and set your finances up for success with this free guide.

Small business loans

If your business is already up and running and earning revenue, your chances of getting a business loan are decent. There are lots of lenders out there, and the Small Business Administration (SBA) backs some of these loans to make lenders more willing to grant loans to fairly new businesses.

The pros

The biggest advantage of using a small business loan is that it allows you to keep your business and personal finances separate. You’ll apply for the loan with your business as the borrower, so it won’t show up on your personal credit report unless you personally guarantee repayment.

Even if you do personally guarantee it, the loan likely won’t affect your personal credit unless you default on the loan.

Next, a small business loan allows you to build credit for your new company. This is critical if you want to borrow again in the future to get more capital. Because even if you go years without having to take out a loan and have an impressive revenue stream, having no business credit history can still hurt your chance of getting good terms.

Finally, a small business loan might qualify for higher loan limits than what you could get with a personal loan.

The cons

There are two drawbacks to business loans: they have stricter requirements and take longer to get.

General qualifications to get approved for an SBA loan include:

  • Being in business for at least two years
  • A 620 credit score or higher
  • At least $100,000 in annual revenue

Of course, requirements can vary depending on the lender. So, if you don’t meet these qualifications, shop around to see if you can find a lender with more relaxed stipulations.

Another issue you may run into is that small business loans are typically secured. Collateral can be business-based, such as inventory, cash savings, or equipment. But depending on the loan amount and the lender, you may be required to use personal property as collateral, such as your house or your car.

Assuming you tick all the right boxes, SBA loans can take a minimum of 60 to 90 days to get approved and disbursed—potentially even longer if you’re asking for a large amount.

Applying for a business loan probably isn’t the right move for you if you need cash in a hurry.

Personal loans

If your business is still new or doesn’t exist yet, a personal loan could solve some of the problems you’d run into with business loans.

The pros

The best thing about personal loans for small business owners is that they don’t require any collateral. So there’s no risk of losing your personal or business assets if you default.

Personal loans can also be much easier to get than small business loans. Some of the top online personal loan companies have a minimum credit score as low as 580, and your business doesn’t have to meet any revenue or age requirements.

The funding timeline is also a lot shorter. You can typically expect to get your money within a week.

The cons

While personal loans are easy to get, that doesn’t necessarily mean they’re better for you. You might run into lower borrowing limits, especially if your personal income is low and you don’t have the means to make the payments. The lender won’t care if your business can make the payments because their approval is based on your personal income and credit history.

What’s more, a personal loan will show up on your credit report. Depending on how much you borrow and your other outstanding debts, a new loan could increase your debt burden enough to make it hard to get approved for other loans in the future.

Plus, a personal loan won’t help your business build a credit history, which will put your business in the same position credit wise next time you want to borrow.

Which one should you choose?

Don’t want to mess with your personal credit score? Need a huge amount of cash? Get a business loan.

Need cash quickly? Business just getting off the ground? A personal loan is probably your best bet.

Accounting 101: Set Your Finances up the Right Way

Learn the fundamentals of small business accounting, and set your finances up for success with this free guide.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

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