Launching your own business comes with a huge price. The startup alone can set you back tens of thousands and you would also require additional funds to grow the business. A lot of entrepreneurs look into loans when they need funding. But there are different types of loans available. Now the choice to make is between a business loan and a personal loan. Each type of loan has its costs and benefits that will impact your finances. This guide will walk you through the key differences between the two types of loans so you can choose the best option for your new business.

What are personal loans?

Personal loans are a type of unsecured loan that can be used to fund almost any expense which includes launching a new business. When your personal loan gets approved, the funds are disbursed in a lump sum form. Then you need to pay the loan monthly plus interest. The loan amount for personal loans will vary. Some personal loan providers can lend up to $50,000 or even more. The repayment term can range from one to five years.

Personal loans are unsecured so you do not need to put up valuable assets such as your home and business as collateral. However, if you make late payments and continue to fall behind, your personal credit score will take a hit. This will make it more difficult to apply for another loan in the future. Since personal loans are offered based on your credit history, a higher score can get you approved with a higher amount and lower interest rate.

Personal Loans for a New Business

Although lenders will allow you to use personal loans for anything, there are some loan providers that will put limitations on how you can spend the amount. if you plan to use a personal loan for your business, make sure that you understand what type of business expenses the loan can be used for.

Remember that a personal loan, despite being used for business purposes, is still tied to your personal credit. This means that you, not the business, are responsible for ensuring that you keep up with the monthly payments. If you fail to keep up with the payment schedule, your personal score will weaken. You will be held personally liable for paying back all outstanding debts from the personal loan.

Pros:

• Unsecured

• Get approved and receive funds on the same day

• Up to $50,000 loan amount

• Business credit history is not required

Cons:

• The borrower is held personally liable for payments

• Not all personal loan providers allow borrowers to use it for businesses

• Higher interest versus business loan

• Does not help with credit building for the business

What are business loans?

Business loans are a type of secured loan given to small businesses instead of individuals. Since these loans are secured, business owners typically use the business itself as collateral for their loans. Business loans can be similar to personal loans with fixed monthly payments. However, there are also business loans with variable payments which will rely on the revenue of your business.

Startups and businesses with variable cash flow will find the flexibility of these loans more advantageous than the usual term loan. Business loans can also cover a much bigger amount than personal loans. Lenders can offer up to hundreds of thousands depending on various factors. Business loan offers are based on both your personal and business credit history. You may also be asked to give a personal guarantee depending on your business’ value. A personal guarantee will also make you personally responsible for payments if the business falls behind schedule or closes.

Business Loans for Your New Venture

Applying for a business loan to cover business expenses ensures that your personal finances are separate from the business. This makes taxes less complicated for business owners. You would also get to qualify for deductions that are specific to businesses.

One major reason to get a business loan for a new venture is to minimize your personal liability when it comes to the loan. If your business fails, you may be able to just walk away from the business debt. But this would still depend on your business’s legal structure and whether the loan has a personal guarantee. If you fail to complete the payments on a business loan, this will affect your future business loan applications.

Pros:

• Loan bigger amounts

• Use funds for every business expense

• Lower interest compared to personal loans

• Business owner is not personally liable for payments

• Differentiate personal from business finances

Cons:

• Some lenders may ask for a personal guarantee

• Business assets as collateral

• Requires businesses to have a credit history

• Longer processing time for application and approval

Loan Providers for New Businesses

Personal Loan

Credible is an online marketplace that allows borrowers to find the best offers for personal loans. You can compare offers from 17 leading personal loan providers. Some of these lenders can offer you up to $100,000 loan amounts and 2.4% APR. Comparing offers through Credible is free and it’s easy to apply for a loan with the platform.

Business Loan

OnDeck is a business loan provider with both lines of credit and term loans for small businesses. For term loans, businesses can loan up to $250,000. For a line of credit, businesses can have up to $100,000. Businesses only need 1 year of activity to qualify for OnDeck’s loan offers. You can also get the funds on the same day of application.

Final Thoughts

One of the most crucial decisions business owners need to make is choosing the right type of loan to fund their venture. Personal loans have a straightforward application and are a good option for new businesses that do not have a credit history. Business loans, meanwhile, have higher loan amounts, limited personal liability, and lower interest rates.