Business Loan vs. Personal Loan: Which is Right For Me?

Not sure if you need a business loan or if a personal loan would suit your needs better? Given how complicated personal and business financing can get, we don’t blame you―but we do want to help.

In this article, we’ll tell you about the big differences between a personal loan and business loan. We’ll help you figure out why you’d want one over the other (hint: it mostly comes down to pricing, intended use, and accessibility), warn you about some potential problems, and even give you some lender recommendations for whichever type of loan you land on.

At first, business loans and personal loans may not look too different to you. They seem to work pretty much the same way, after all.

Both loan types give you money that you have to repay, usually with interest and fees added on. And in this day and age, you have plenty of lender choices for both kinds of loans―so you can get personal and business loans from a traditional financial institution (like a bank or credit union) or an alternative one (an online lender).

But, as it turns out, personal loans and business loans have some key differences. Once you know and understand those differences, it should be clear which kind of financing will work better for you.

The biggest difference between business loans and personal loans? How you can use them.

Business loans must be used for business expenses. In fact, your lender will almost definitely require your loan money to go into a business bank account―not a personal one―or it may send the loans directly to a vendor (like an equipment dealer).

Now, business loans can help with all sorts of business expenses, from basic cash flow to payroll to equipment purchases to marketing (and much more). But the key is that these are all business expenses―not personal ones. And if you try to use your business loan for personal reasons, you could end up in big trouble.

Personal loans, on the other hand, can offer more flexibility. Of course you can use personal loans for personal expenses―but you may also be able to use personal loans for your business.

This does depend on your personal loan type and your lender. Trying to use a home mortgage to pay for business equipment won’t get you very far, for example, and using a student loan to make payroll will cause big problems for you. But if you get a personal loan from the right lender, you can use the loan for home improvements or business equipment―no problem. 

Put simply, if you need a loan for a personal expense, you definitely want a personal loan (and you can stop reading now). But if you need a loan for a business reason, you might get by with either a business loan or a personal loan. (And from this point on, we’re assuming you need a loan for your business.)

Just because it’s possible to use either a personal loan or a business loan for business stuff doesn’t mean you’ll actually be able to. That’s because you have to meet certain borrower requirements for either kind of loan, and business loan requirements tend to be stricter.

With either a personal or business loan, you should expect your lender to check your personal credit. In most cases, they’ll have a certain minimum credit score requirement you have to meet to qualify. But credit score aside, the two types of loans have different requirements.

For a personal loan, your lender mostly cares about your personal income, your credit history, and your individual cash flow.

A business lender may want to know about those things too, but that will be just the tip of the iceberg. A business lender will look at things like these:

• Age of your business
• Annual revenue
• Business cash flow
• Business plan and projections
• Business credit score and credit history

That means that (in most cases) a business loan is harder to qualify for than a personal loan―because you need good personal qualifications and good business qualifications.

But if you can qualify for a business loan, we usually recommend you go that route for reasons that will soon become clear.

When it comes down to it, business loans are usually better suited to business expenses than personal loans are.

In part, that’s because business loans come in much larger loan sizes. A general personal term loan often maxes out around $50,000, while general business loans max out closer to $500,000 or even $1 million. (Of course, the specifics depend on your lender and your borrower qualifications.)

And the same is true for loans with specific uses. Commercial real estate loans routinely go into the millions of dollars, while your average consumer real estate loan program won’t go nearly that high. Likewise, business equipment loan amounts can offer hundreds of thousands of dollars to purchase niche equipment and vehicles. You won’t get that kind of money from a typical consumer auto loan.

So if you need more money (and business expenses get pretty big), a business loan often works better.

Finally, the two types of loans build credit differently.

Both business loans and personal loans can build credit. That means they appear on your credit history, and (assuming you pay them off as planned) can help to improve your credit score over time.

But business loans have another advantage: they may also build your business credit. It works pretty much the same way as personal credit, but in this case the loan goes on your business’s credit history and boosts your business’s credit score.

Since many of the best lenders check business credit as part of your loan application, opting for a credit-building business loan today can really pay off in the future.

Now, with all those differences to think about, which type of loan will work better for you―business or personal?

If you can qualify for a business loan, that’s what we recommend doing in most cases.

After all, business loans are designed for business use. They come with higher loan amounts for those bigger expenses, for example. And business loans get deposited right into your business bank account or sent straight to your vendor, making them more convenient for you.

Plus, business loans have the potential to improve both your personal credit and your business credit―giving you the opportunity to qualify for better business and personal loans in the future.

Of course, if you’ve got a young business, you may not be able to qualify for a business loan right now. In that case, a personal loan will serve you better. And in some cases, you may technically qualify for some kind of business financing, but a personal loan could end up being cheaper. So a business loan may not always be the right choice.

But for most businesses, a business loan has enough benefits to make it the right borrowing choice. (And you can find the perfect business loan on our rankings of the best small-business loans.)

If your business can’t yet qualify for a business loan, then a personal loan may work just fine.

No, personal loans aren’t designed for business use. But if you have smaller financing needs (like a local marketing campaign or a discounted inventory opportunity) than a personal loan may still work out for you anyway.

There may even be times where your high credit score but low business revenue and time in business mean that a personal loan offers a much better deal―at least for now.

That said, we do recommend trying for a business loan whenever your business matures enough to qualify. That way, you can get the business credit building potential of a business loan―opening up more and better financing opportunities in the future.

Until then, though, a personal loan can help you take care of your business’s needs. (Just make sure your lender allows for business uses by sticking to the best personal loans for business.)

Both personal and business loans can be viable financing options for your business―but it’s likely one will work better for you than the other.

In most cases, we recommend sticking with a business loan for your business needs. That way, you can get big loans designed for business use, and you can build your business and personal credit profiles. But if you’ve got a young business that can’t yet qualify for a business loan, you may be better off with a personal loan.

Either way, we hope you get the working capital your business needs.

If you opt for a business loan, you’ll need a business bank account. Find a great one with our rankings of the best banks for small business.

A business loan is just a type of loan designed specifically for business expenses (as opposed to personal expenses). So all business loans are loans, but not all loans are business loans.

No, you cannot use a business loan for personal use. Seriously, just don’t.

There’s no easy answer to whether business loans or personal loans are cheaper. Starting interest rates and loan fees (like origination fees) depend on the specific type of loan you get (like a term loan versus a real estate loan) and your chosen lender. Likewise, your specific interest rate offers will depend on your personal and business qualifications.

That said, most of the personal loan lenders that offer consumer loans for business use have higher starting rates than the top business lenders. So in many cases, a business loan will end up being cheaper for your business than a consumer loan would be.

Disclaimer

At Business.org, our research is meant to offer general product and service recommendations. We don't guarantee that our suggestions will work best for each individual or business, so consider your unique needs when choosing products and services.