business loan decision

Do you need a business loan or a personal loan?

Information verified correct on October 28th, 2016

There is a range of financing options available for businesses. Find out if your business is more suited to a business loan or personal loan.

There are many reasons why a company may choose to take out a loan. A sudden spike in sales might have created a need for some additional cash flow, or maybe that influx has created the need to expand. While a tailored business loan would seem to be the obvious choice, many smaller companies still side with a personal loan, believing in its security and simplicity. Here we consider the pros and cons of both.

Which is easier to set up, a business loan or a personal loan?

  • Business loan. Most banks want to see detailed projections, business plans and assurances that your company will be in a position to make repayments for the whole loan period. However, many online business lenders require fewer details to approve a business loan. You’ll find these lenders may approve you after simply seeing your business’s accounting information or financials as well as your own personal information.
  • Personal loan. The fate of your application for a personal loan will be predominantly decided by your credit position and your own personal financial situation. You’ll also need proof of income, and as you are self-employed you will likely need the last two years of tax returns.

Which offers better value for my business?

  • Business loan. For business taxes, there are significant benefits to keeping your personal and business affairs separate. As well as claiming goods and services tax, retail and manufacturing companies, in particular, can benefit from reduced import duties on products purchased using your loan.
  • Personal loan. Ensuring that you are not being overcharged for business expenses that are paid for with a personal loan can be difficult and time-consuming.
What if I have business partners?

If you opt for a business loan, the loan will be held in a joint account with easy access for all partners. With the loan guaranteed by each partner, the risk placed on each individual is greatly reduced. If you decide to apply for a personal loan, lack of joint access to your company’s loan may affect the efficiency of your company, or create issues of responsibility if the business is unable to meet repayments.

However, there is the option of taking out a joint application personal loan. These loans usually have a maximum of two applicants, although some allow up to four.

Do business loans or personal loans offer better flexibility?

Business loans

  • Lenders are likely to enforce strict limits in the first 12 months of your loan, but if you can back up your initial projections you could well be granted an increase in your funding amount.
  • You will need to use the entire loan amount for business purposes.

Personal loans

  • If you want to take out more funds later on, you will have to prove to the bank that your personal loan was in fact used, successfully, to fund a growing business. The administrative processes attached to this can be slow.
  • Funds can be used for business purposes as well as for other personal needs.

Should I opt for a secured or unsecured loan?

  • Business loan. Deciding between a secured or unsecured business loan will often depend largely on the amount of money required. Most banks require security for startup loans, or only offer unsecured line of credit loans. However, there are now a number of online lenders offering unsecured loans. Keep in mind that these unsecured loans can come with higher rates, so if you do you have security to offer you may want to compare what secured options you have available.
  • Personal loan. There are a variety of assets you can secure a personal loan to. However, if the business fails it will have a huge impact on your home and professional life should you default on the loan.

Is there anything else to consider?

Before you apply for a loan, there are a number of other factors worth thinking about.

  • Sole trader or partnership? There are clear reasons why a business loan would most likely be better suited to a company run by partners. However, a sole trader may appreciate the control they have over a personal loan, which will likely involve a smaller sum of money.
  • The length of the loan. For a shorter period, the lower rates of a personal loan might hold more appeal. However, over an extended period, for example, 10 years, this advantage might be overshadowed by the ease of use offered by a business loan.
  • The age of the company. One of the most common issues with a business loan is getting access to it in the first place. Startup companies will need to decide whether the difficulty of accessing the type of finance they’ve chosen will be worth it in the long-term.
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