When looking to finance a business there are many options available to entrepreneurs. You can look into traditional business financing options, like business loans and investments, as well as exploring other avenues such as using a personal loan to cover business expenses.
This second option can be a confusing area of finance – can you use a personal loan for a business?
In this guide, we’re going to explore the important aspects of both personal loans vs business loans and explain what they could mean for you and your business.
Business Loans
Business loans are injections of finance that can be used by businesses for any number of reasons. You may be looking to grow the company through acquisition, invest in more impactful marketing or simply needing to buy more stock.
Like all loans, business loans are approved based on affordability and passing a credit check. This can sometimes be tricky for smaller businesses and startups that don’t yet have a proven financial track record. This can make securing funding a challenge.
There are business loans tailored to smaller businesses, in which case you will need to provide a strong business plan and accurate cash flow forecasts. Whilst this makes it possible for small businesses to access loans, the application process can drag on for months.
Key features of business loans
As they are specifically designed for companies, there are some notable advantages to securing funding via a business loan.
They are available in larger amounts
Business loans are typically offered with much larger balances. This is ideal for smaller organisations that need capital to get off the ground.
Designed for business
A business loan is designed to be supplied to and repaid by a business. This means financing and repayment terms are better suited to companies. An example of this would be business-ready loans to help with the post-pandemic return to the office, invoice financing or a merchant cash advance.
Professional support
Business loans often come with professional support included. This is especially useful to smaller businesses and startups with less experience in managing their capital. This is in contrast to personal loans where how the money is spent is of little interest to the lender.
Building a credit score
Building a credit score for both yourself and your business is important. Taking out a business loan allows you to do so for your company. A personal loan in your name would only affect your score. This is important for securing future funding.
Applications can be slow
The application process for business loans can be a long and often very slow process. This is because the lender typically has to assess business viability before approving the loan. If the business has less financial history then this can take even longer.
Personal Loans
A personal loan does what it says on the tin, it’s designed for individuals to use in personal situations. Common uses for personal loans include covering household bills, helping with unexpected expenses and purchasing large items like a new car.
They are taken out under your name and you will be liable for the balance. This is in contrast to a business loan where the business itself would be liable, providing it is a limited company or limited liability partnership.
Key features of a personal loan
Personal loans come with a different set of rules, regulations and qualifying factors. It’s important to know their key features when thinking about applying for one.
Typically smaller amounts
Compared with business loans, personal ones are available in smaller amounts. This usually ranges between £1000 and £25000. Business loans on the other hand can run into hundreds of thousands of pounds.
Personal liability
Understanding who is liable for the loan is vital prior to application. Usually, personal loans come with individual liability meaning the applicant is responsible for the repayments rather than the company.
Less support from the lender
Whereas business loans come with financial support and advice, personal loans do not. The lender is less interested in how the money is likely to be spent due to the smaller amounts involved.
Quicker application process
The process for applying for a personal loan is often much quicker than when applying for a business one. This is because the amounts involved are often much lower and an individual’s personal finance history is typically clearer. This means securing a personal loan can be a better way for businesses to solve smaller short term cash flow problems.
As with all financial products, it is important to shop around to find the best ones for your personal or business needs. For example, if the lengthy applications are putting you off securing finance for your business then consider applying with White Oak. Our loans can be delivered to your account in as little as 24 hours with 4 out of 5 applications being approved.
Business and personal loan FAQs
Which is better; a personal loan or business loan?
If you go for a business loan you will be able to secure more funding when compared to a personal loan. This means a business loan is better suited to larger organisations whereas personal loans may be a better choice for smaller ones.
Can I use a personal loan for business use?
This depends on the specifics of the loan itself. Some personal loans will specifically outline that they are not to be used for business use. If this is the case and the lender discovers the terms have been breached then they may ask for the loan to be repaid immediately.
Can you use a personal loan to buy a business?
Some personal loans can be used for corporate activities such as funding existing or acquiring new businesses. However, this varies on a case by case basis so needs to be checked before applying.
Is a business loan cheaper than a personal loan?
Business loan rates are usually cheaper than personal loan rates. This is due to many factors including the fact that business loans are often regarded as less risky. A personal loan can be taken out in a matter of days whereas a business loan requires a more thorough application that takes much longer.
Talk to us
If you are looking to find the right finance for your business, contact us today.
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