Business Loan vs. Personal Loan For Small Businesses

By Sam Swenson | Updated November 30, 2022
reading time 8 min read
Older man in glasses looking up small business loans on a laptop

Key Takeaways

  • A term loan for small business can typically only be used to start, run, or grow your small business; use of funds is typically more restrictive.
  • An unsecured personal loan offers flexible use of funds for just about anything, such as covering the cost of home repairs, paying off medical bills, or consolidating credit card debt.
  • Deciding between a business loan or personal loan for your small business depends on your needs, what makes sense with your situation, and your ability to repay the loan.

A business loan, sometimes called a small business loan, may be used to pay for invoices or equipment, or to hire more employees. Given that the business needs are diverse, there are different types of loan options available including term loans, Small Business Administration (SBA) loans, business lines of credit, and invoice financing. 

Depending on your business needs, business loans can be short- or long-term. But you don’t always need to stick to a business loan to help cover your business needs and costs—you could also use an unsecured personal loan

The type of loan options are designed with a different purpose.Business loans are typically structured with work-related needs in mind, while a personal loan can be used for just about anything. Personal loans can be used for destination weddings, paying down medical debt,and yes, even business-related expenses.

Pro-tip: If you’re considering a personal loan for your business, be sure to check with the lender first. Some lenders may not allow it. 

Credit scores and the longevity of your business also come into play when it comes to qualifying for a loan. This guide will outline the differences between business loans (mainly term loans) and personal loans, and will help you determine which is best for your small business.

What is a business loan?

A business loan funds a need that directly impacts your business. Let’s say you needed to increase headcount for the year or invest in new technology—a business loan would be perfect for either. There are even business loans that specifically cater to equipment financing and invoice financing.

When it comes to applying, business loans traditionally require a more lengthy process because the lender wants to fully understand how your company has been performing. Depending on what the lender asks for, you may need to gather financial statements and projections. The lender then assesses if it makes sense for them to loan you the money.

Small business loans can be both secured or unsecured. A secured loan means you need to put up collateral such as investments or real estate in order to qualify. Unsecured business loans, on the other hand, don’t require collateral. Qualifying for either a secured or an unsecured loan will depend on your business and personal credit history. 

For repayment, business loans may offer longer terms than personal loans, depending on what the loan is used for. The terms can be around 10 years or so, but it can be longer. For example, if you used the funds to buy property or real estate, your term could be 25 years. The length of a personal loan is much shorter—usually up to five years. In some cases, you may see a term length of up to seven years. For business loans, you may need strong personal credit and a good business credit score. 

While it might involve a lengthier process than a personal loan, a business loan may afford you a lower interest rate. If lenders see that your business is doing well, and feel confident you can repay the loan in a timely manner, you may be able to lock in favorable terms. A lower interest rate can potentially save you hundreds or even thousands of dollars over the life of the loan.

How do business loans work?

Business loans are issued either as a lump sum or as a credit line. A credit line can be used like a credit card, with the funds available at your discretion. You’re responsible to pay down the line of credit on a recurring basis, but the terms of repayment may vary. Depending on the type of loan, you may be able to pay it back daily, weekly, or monthly. There are fees and interest associated with all scenarios; fees and interest will increase if you ever miss a payment deadline.

While some business loans are unsecured, certain lenders may still require you to sign a personal guarantee. A personal guarantee is a document that says you accept personal liability to pay the loan back, even if your business fails. 

Here’s a quick glance at the pros and cons of business loans, as it relates to personal loans:

Pros of a Business Loan to Use for Your Business Cons of a Business Loan to Use for Your Business
Keeps personal and business finances separate (i.e., taxes and liabilities) A personal guarantee may be required, even if the loan is unsecured
You can build business credit, which could make it easier to get approved for future loans and credit May be difficult to get approved if the business is new or doesn’t have established history
Loan amounts may be greater than a personal loan Lengthier application process compared to a personal loan
Potentially lower interest rates if you qualify May take longer to get funded

What is a personal loan?

Personal loans are unsecured loans issued by banks or lenders. There are various reasons why people apply for personal loans, but there’s usually an end goal in mind. A personal loan can be used for:

  • Fixing a car
  • Medical or dental bills
  • Consolidating high-interest credit card debt
  • Paying back a friend 

How do personal loans work?

Personal loans are typically unsecured, which means you can take out the loan without putting up valuable assets like a house, car, or investment portfolio as collateral. 

The application process is quick, and depending on the lender, you can receive the funds the day after approval. In order to qualify for the best rate, however, you need a strong credit score. 

Once you apply and receive the money, you have a certain length of time to pay back the loan—usually within one to five years. If you choose to pay off earlier than the term, you can. However, every lender is different, so make sure to check to see if prepayment penalties apply.

With personal loans, the flexibility and interest rates are usually much more manageable than credit cards. This makes a personal loan an option for large purchases or debt consolidation. If you have multiple debts to pay off with different monthly due dates for each, a personal loan can help you combine them—resulting in one simple payment each month.

Business loan vs. personal loan

Take a look at the following table to help you better understand the differences between each loan. 

Keep in mind, loan amounts and terms vary by lender.

Business Loan Personal Loan
Typical loan amount Can range from thousands to millions, depending on the type of business loan—larger amounts are available relative to personal loans Can range from $1,000 to $100,000

Through Upstart: $1,000 to $50,000¹

Loans can be used for Needs directly impacting a business (i.e., buying supplies, payroll, repairing machinery, etc.) Broader lifestyle needs (i.e., paying off high-interest credit cards, medical bills, fixing your home, etc.)
Terms Can be up to 10 years or longer Can be up to 5 years or longer
Do the loans require collateral? Yes, but not always Not for unsecured loans
Is the interest  tax deductible?  Yes, against business income only No, unless funds are used to fund a business expense
Ability to build business credit upon repayment? Yes No

The two loans differ mainly in their purpose. Business loans tend to be more restrictive and can only be used for the direct needs of a business.Personal loans offer more flexibility and are typically used to fund lifestyle expenses, such as covering the cost of home repairs, paying off medical bills, or consolidating credit card debt.

What about using personal loans for business-related purposes? 

Using a personal loan for your business can introduce personal liability to the situation. If you can’t pay the loan back, you will be on the hook as an individual—rather than the business. Defaulting on a loan, missing payments, or paying late can negatively impact your personal credit score, as well as your reputation.

Here’s a table that briefly outlines the pros and cons of a personal loan when it comes to funding your small business needs.

Pros of Using a Personal Loan for Your Small Business Cons of Using a Personal Loan for Your Small Business
Simple application and approval process You are responsible for paying the loan back, even if your business can’t
Quick funding after approval, sometimes the next day Interest on personal loans may not be tax deductible
Typically unsecured, so no need to put up collateral Shorter terms for repayment (typically 1 to 5 years)
A fast way to fund the next step for your business Loan amount is likely lower than a business loan

When a business loan might make sense

While some businesses may choose to turn to business credit cards to make everyday purchases, a business loan could make more sense if cash is tight or needs to be funneled into other areas.

Also, if you need the loan to pay for business-related property or hire new employees, you likely need a substantial amount, which means a business loan could make more sense over a personal loan.

When a personal loan might make sense

Let’s say you also have great credit and need $7,000 to pay for marketing materials and a freelance graphic designer. Your cash flow is steady and you know you can knock out the loan within the terms—three to five years. In this case, a personal loan could be a better fit than a business loan. 

Or maybe you encountered an unexpected emergency, and you want additional peace of mind while still keeping your business moving forward.

Both of these scenarios could make a personal loan a reasonable choice.

When a personal loan doesn’t make sense for business needs

If you need a large loan amount, a personal loan is probably not the best choice. A personal loan is typically between $1,000 to $50,000 in amount, and you’ll be personally liable for paying the outstanding loan balance if the business can’t. 

The terms for a personal loan repayment (usually one to five years) may feel tight if you’re taking out a large amount. If you don’t think your business will generate enough revenue to cover repayment within the necessary timeframe, this can be stressful. 

Choosing a business loan or personal loan: which one?

To recap, here are scenarios for consideration when deciding between a business or personal loan:

When a business loan makes more sense:

  • You need to borrow a sum of money greater than $50,000
  • You want to separate personal and business assets
  • You’d like to build credit for your business

When a personal loan makes more sense:

  • Your business is relatively new and isn’t generating a lot of revenue
  • Your business credit history is weak but your personal credit history is strong
  • You need the money quicker than your business lender can offer
  • You don’t want to put up collateral

Regardless of the type of loan that suits your needs best, make sure you:

  • Review the qualification requirements and gather the proper loan application documents
  • Apply to be prequalified to learn what rate you can get (it won’t hurt your credit score) 
  • Shop around to compare the best rates

Qualifying for business loan or personal loan

For business loans, you may need strong personal credit and a good business credit score. 

While the business loan application process can be longer than the personal loan application process, if lenders see that your business is doing well, you may be able to get a lower interest rate on your business loan. A lower interest rate can potentially save you hundreds or thousands of dollars over time.

Running your own business gives you an opportunity to be your own boss. You’re tasked with the challenge of staying profitable while maintaining growth, regardless of whether you’re solopreneuring it or running a larger company with employees. Choosing a business loan or personal loan needs to make sense with your situation and your ability to repay the loan.

Applying for a business loan or personal loan

To apply for a business or personal loan, you need to have a solid credit history and regular, stable income. For both loans, you must show that your debt-to-income ratio isn’t too high. This means if you already have a lot of other loans to pay off or have existing credit card debt, it may hurt your chances to qualify.

Pro-tip: If you are in need of funds to grow your small business, online lending marketplaces like Upstart are designed for speed and convenience, and can process your application fast.

When you apply for a business loan you may need to gather documents that show your annual revenue, profits, and cash flow, as well as any relevant legal documents, licenses, and permits. Some lenders also ask that you submit a business plan that explains what the loan would be used for. 

No matter which loan you choose, always take the time to research the various options and shop around for the best rate and loan terms.

¹ Your loan amount will be determined based on your credit, income, and certain other information provided in your loan application. Not all applicants will qualify for the full amount. Minimum loan amounts vary by state. Note that certain states have specific minimum loan amounts.

This content is general in nature and is provided for informational purposes only. Upstart is not a financial advisor and does not offer financial planning services. This content may contain references to products and services offered through Upstart’s credit marketplace.

About the Author

Sam Swenson

Sam is a fee-only financial planner, CPA, and freelance writer. After nearly a decade in various Wall Street roles, Sam found a niche in creating objective, accessible, and actionable financial plans for everyday people. Sam has also published long- and short-form personal finance and investment planning content on various websites across the internet. Outside of work, Sam enjoys running, biking, reading, and philosophy, as well as spending time with his wife, daughter, and goldendoodle.

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