Business Loan vs Personal Loan: What’s the Difference?

A business loan is designed specifically for business-related expenses and is usually tied to your business’s financials. A personal loan, on the other hand, is based on your personal credit and income, and you’re personally responsible for paying it back, even if you use it for business.

While both can help you cover expenses, they’re designed for different situations and come with their own set of rules. 

The differences matter, from how they affect your credit to what you can use them for. In this guide, we’ll explain everything in simple terms so you can choose the option that makes the most sense for your needs.

What is a Business Loan?

A business loan is a type of financing specifically used for business-related expenses and is directly tied to your company’s financial health, including its business credit. Whether you’re starting, growing, or maintaining a business, a business loan or similar form of company financing can help cover a wide range of costs. 

When it comes to loan structure, the type of loan you choose, such as a corporate loan or commercial loan, will determine what loan terms and repayment will look like. Most often, these loans come with fixed interest rates and may be either secured or unsecured. To qualify for business financing, you generally need to have a legally registered, for-profit business based in the United States, a solid business plan, and proof of your ability to repay the loan.

Pros and Cons of a Business Loan

Some pros of a business loan include access to capital, the ability to build business credit, and flexibility. Some cons of a business loan include added debt, interest, and fees, and risk of default. We’ll go into more detail about these below:

Pros

• Access to Capital — A business loan makes it possible to get funding and many times a lot of it, so you can take care of any expense that comes your way. 

• Your Personal Credit Score Won’t be Impacted — One major benefit of business loans is that your personal credit score won’t be impacted by a business loan (as long as there isn’t a personal guarantee). 
• Build Business Credit — With on-time payments to your business loan, you can help build your business credit score, which can mean more borrowing opportunities in the future if the need comes up. 

• Flexibility With Use and Company Ownership — You can use small business loans for almost any business-related expense, whether that is healthcare costs, equipment, paying employees, or anything of that sort, you’ll get flexibility. And with these loans, the business still remains yours to do as you would like. 

• Potential Tax Benefits — Usually, the interest that you pay on a business loan is tax-deductible. 

Cons 

• Having a Debt Obligation — Of course, taking out a business loan will mean that your business will be in debt, which can mean less profitability until the loan is repaid in full, including the need to pay interest and fees. 

• Risk of Default — If you cannot repay your loan, then you risk default, which can mean hurting your business credit. Additionally, it can mean losing business assets and legal ramifications. 

• Some Lenders May Require a Personal Guarantee — For some business loans, lenders may require a personal guarantee, which means you are personally responsible for repaying the business loan if your business cannot. 

What is a Personal Loan?

A personal loan is a type of installment loan that can be used for all kinds of expenses, including business purposes or costs. You can find a personal loan at a bank, credit union, or online lender. Generally,  personal loans are unsecured, make funds available in a lump sum, come in a range of amounts, and are repaid in steady monthly payments until paid off in full. Interest rates are usually fixed. 

Most people with a fair to good personal credit score and a source of income will be eligible for a personal loan. Those with bad credit may have to turn to online lenders or get a cosigner for their loan. The better your credit and the higher your income and ability to repay a personal loan, the more you may qualify for and the better interest rates you could get. 

Most people use a personal loan for emergency expenses such as car repair, medical bill, or home repair. However, they can be used for business purposes if needed. In most cases, you’ll have flexibility with spending. 

Pros and Cons of a Personal Loan

Some pros of a personal loan include ease of access, flexibility with spending, and speed. Some cons of a personal loan include limited funding (when thinking about the large costs that can come with a business). Here is more detail:

Pros

• Ease of Access — Personal loans are available through most lenders. Eligibility requirements are less stringent than small business loans. 

• Flexibility With Spending — Personal loan funds can be used for all kinds of expenses. 

• Speed — Personal loans are made to be extremely fast, which is helpful as a business owner. Sometimes funding can be as fast as the same business day. 

Business or Personal Loan? What Are the Key Differences?

When deciding between a business loan and a personal loan, the key difference between these loans is how they impact credit. Business loans impact business credit (with the exception of a personal guarantee), and personal loans impact personal credit. 

Some other key differences include interest rates, terms, credit requirements, and documentation required. We’ll go into more detail about these below: 

Aspect	Personal Loans	Business Loans
Interest Rates	Usually higher	Usually lower
Terms	Typically much shorter	Can be longer, depending on business needs and lender criteria
Credit & Eligibility Requirements	Generally based on an individual’s credit score and income	May consider both business and personal credit, as well as business revenue and history
Documents Required	Fewer documents, often just ID, proof of income, and credit info	More extensive, including business plans, financial statements, tax returns, etc.

Which Loan is Better For My Situation?

In general, a personal loan works best when it’s for personal expenses, and in most cases, a business loan will work best for business-related expenses. However, if you need urgent financial assistance for your business, then a personal loan may be the most appropriate funding option. 

When choosing between a personal and business loan. Here are some other things to consider:

• The Loan Amount You Need — In general, business loans will offer more funding than personal loans. If you need a substantial amount, then a business loan may work better for you. 

• Personal Credit vs Business Credit — If you don’t want a personal credit history and score impacted by your business and would rather use business credit, then you can choose a business loan (the exception is when you have a personal guarantee). 

• Tax Implications — The interest you pay on a business loan can be tax-deductible, while the interest on a personal loan will not be, even if you use your personal loan for business-related expenses. Something to keep in mind when deciding between personal and business loans. 

• Documentation Requirements — Business loans require a lot more documentation than a personal loan. For example, you’ll need financial statements, business plans, and proof of revenue.

• Loan Terms and Repayment — Business loans may offer more customized repayment terms, especially if you’re working with a lender familiar with your industry. Personal loans often come with fixed terms and less flexibility.

• Personal Liability — Taking out a personal loan for business expenses means you’re personally responsible for repayment. Business loans may offer limited liability, especially if your business is structured as an LLC or corporation.

Mistake to Avoid

Some mistakes to avoid when deciding between a business loan vs personal loan include misuse of funds, failing to separate business expenses and personal expenses (including lack of tracking these for taxes), overlooking the impact on personal credit along with the loan rates and repayment terms. We’ll go into more detail about these mistakes: 

• Misuse of Funds — Many people make the mistake of using their business loans for personal finances, such as paying off their personal debts, doing so can violate business loan terms. Alternatively, some may use personal loan funds for business purposes without truly understanding the potential risks and implications. 
  
• Failing to Separate Business Expenses — Another mistake comes down to tracking. Many people fail to separate business and personal expenses, which leads to confusion when tracking spending, complicates tax filings, and can result in lost deductions. It also blurs the line between personal and business liability, potentially putting personal assets at risk in the event of legal or financial issues. Keeping finances separate is essential for clarity, compliance, and protection.

• Lack of Tracking for Taxes — Some forget to track the amount of interest they pay on their business loan, or may accidentally file for a tax deduction if they use their personal loan for business expenses. 

• Overlooking Impact on Personal Credit Score— While business loans can be separate, in some cases, they can impact your personal credit. For businesses that don’t have a long credit history or a low score, financial institutions may require a personal guarantee, which can impact your credit score. 

• Not Paying Attention to Loan Rates and Repayment Terms — Both personal loan lenders and lenders of SBA loans (loans from the Small Business Administration) will have their own interest rates and repayment terms. It’s essential to pay attention to them. Many people may not pay as close attention to these important details as they may need, which can lead to default or borrowing a more expensive loan. 

FAQ

Is a personal loan better than a business loan?

It depends. Personal loans work better for personal expenses, while business loans and business credit cards can work better for business costs. However, this is a very general answer. There are a lot of nuances and considerations to keep in mind when choosing between a business loan and a personal loan. 

Will a business or personal loan affect my credit score?

Yes, both business and personal loans can impact your credit score, but in different ways. Applying for either can cause a small, temporary drop because of a hard credit check. A personal loan will impact your personal credit, while a business loan will only impact your business credit, unless you have a personal guarantee (which means you’ll pay back the loan if your business cannot). Additionally, how you pay back either loan will impact the respective credit profile. 

Can a personal loan be used for business?

Yes, you can use a personal loan for business expenses. Just keep in mind that since it’s in your name, it’ll show up on your personal credit report, even if the money goes to your business. Along with that, there are potential risks and complications that can come with mixing your personal credit with business finances.