Business Loans Vs Personal Loans

In this guide, we are going to be outlining for you the difference between a business loan and a personal loan. We will also be defining each loan type, and then providing a side by side comparison of each loan product. It is important that you do not enter into any loan or credit agreement without first understanding the terms and conditions of your loan. Furthermore, you should never take out a loan unless you are fully prepared and financially able to pay it back in full, inclusive of interest. Failure to repay a loan in full or missing a loan repayment can have a negative impact upon your credit score which could, in turn, affect future applications for credit.

Before we compare the loans, we first need to understand the loans. We will start by defining a business loan.

So What Exactly Is A Business Loan?

A business loan is designed to be lent to a business, rather than to an individual. With a business loan, you can generally borrow far larger amounts than is possible with a personal loan. Depending on the size of your business, the industry that you operate within, your profitability, and the age of the business (this is not an exhaustive list – other factors are considered by lenders) then you can borrow between £5000 and £1 million. Loan repayment durations are also variable and start at 1-3 months, similar to the term of a short term loan, and rise to a maximum of 15-20 years.

As you can imagine, business loans come in many shapes and sizes and are incredibly varied. They are however generally grouped into two distinct categories.

Unsecured Loans: You borrow the loan amount without offering up an asset as security, such as your business. This is considered of greater risk to the lender, and of lesser risk to the loanee.

Secured Loans: You borrow the loan amount and offer up an asset to secure the lender against loss, and to minimise their risk. If you do end up defaulting on your loan then your lender is able to repossess and then sell your asset in order to recoup their money.

What Could You Use A Business Loan For?

When you apply for a business loan you might need to provide the bank or the lender from whom you are borrowing the money from with a detailed breakdown of everything you intend to spend the loan on. Businesses will generally spend their business loan on:

  • New stock or assets that will enable them to create more stock
  • Paying off or consolidating debts
  • Hiring new staff members to help them cope with an increased demand
  • An office move or an office upscale
  • New equipment, new technology or software
  • Operational expansions

So now we have broken down for you the definition of a business loan. We will now proceed to break down for you the definition of a personal loan.

So What Is A Personal Loan?

Just as a business loan is a loan that is designed to be lent to and subsequently used by businesses, a personal loan is designed to be used and lent for personal uses. This means it is provided to an individual, rather than a business. Personal loans are offered by most major banks and lenders. Generally, personal loans are paid off in monthly instalments by the individual, over a fixed term, from 1 year up to 10 years (this figure can vary from lender to lender). The amounts that you can borrow also vary but the maximum limit is nowhere near as high as you can borrow with a business loan. The majority of personal loans are unsecured. People can use personal loans for a wide range of things and loanees do not have to provide a spend-breakdown as is the case with a business loan. The following are examples of things that individuals can and do spend personal loans on:

  • Home improvements, such as a new driveway, an extension, a conservatory or a new kitchen
  • A new car or a new vehicle
  • Debt consolidation, including credit card debt consolidation

The differences between personal loans and business loans may seem obvious. However, it is important to know the definitions of these very different loan products especially if you are currently looking to secure yourself a loan and are unsure as to which loan is best for you. We will now provide you with a side by side comparison of these different loans.

It is worth noting at this stage that the distinction in terms of choice is usually a simple one. Generally speaking, if you need a loan for personal reasons, such as those outlined above, then you would choose a personal loan. If your business needs a loan, or if you need a loan for business purposes (please also see the information as listed above) then you would choose a business loan. However, it is not always as clear cut as it may seem and it is important to provide a side by side comparison of these two seemingly disparate products as there can be a crossover of usage and intention. In the following passage, we will be comparing the two loans using certain categories as metrics.

Personal Loan Vs Business Loans: Timescales

As mentioned above, the information that is required for a personal loan application can be far less than is the case with a business loan, and far less assessment might take place on behalf of the lender. Furthermore, with a personal loan, you might not need to provide a breakdown of your intended usage of the loan. This means that you could have the money that you need faster with a personal loan. A business loan can take weeks to be approved/denied. It is worth noting that in some instances a personal loan can also take a long time to be approved/denied.

Personal Loan Vs Business Loans: Start Ups

It is a shame that start-ups, even those with good prospects and a stellar business model or plan in place can run into difficulty when it comes to accessing business loans (especially business loans with the best or most favourable terms). If this applies to you, as the head of or a member of a start-up and you are currently struggling to secure yourself a business loan then there are many other ways that you might source the money that you need. You could try:

  • Approaching lenders that specialise in providing business loans/finance to start-ups
  • Crowd funding
  • Loans from family and/or friends

(Please see below for further information on this subject).

Personal Loan Vs Business Loans: Options

With a personal loan, you are loaning the money from the lender and repaying this amount back over a pre-agreed period of time, inclusive of interest. With business loans, you have a wide and varied range of different loan options that are as eclectic and diverse as the businesses that take out loans in the first instance, an example of the business loan options are as follows:

Credit facilities (revolving): this will allow you to borrow money that your business needs, when your business needs it. The interest you pay is directly related to the amount you have borrowed and with revolving credit facilities you are able to pay back the amount in full when you can.

Working capital: working capital lets you borrow money for everyday business costs such as paying employee wages.

Government start up: this is a type of loan designed specifically for new businesses and start-ups. We would recommend that you always research government start up loans and investment opportunities as they can provide you with a lucrative investment of cash. If you are starting up a business, you can borrow a pre-determined figure and pay it back over a period of time with favourable terms designed for new businesses.

Bank loans: this loan type allows a business to secure a lump sum cash injection, paying it back over an agreed period of time. With a bank loan for businesses many banks will ask for a director’s guarantee which, if asked for and then provided, will mean that the company director is responsible for the debt should the business be unable to pay it back.

Peer to peer: mostly offered via specialised platforms that connect investors to businesses. Used by the former to make a positive return on their investment. A director’s guarantee may apply.

Short term: a type of borrowing that lasts from a week up to 12 months. The interest on short term loans can be much higher than with other business loan types.

Equipment finance: this type of finance allows you to borrow money to buy specialised industry equipment.

Asset backed: this type of business loan allows you to offer up an asset as security against your borrowing. With asset backed business loans you are able to borrow larger amounts and can use things such as business equipment, land and stock as security. If you are unable to pay back your loan then you might lose that asset that you had used as security.

Choosing Your Loan

You should learn and know the differences between personal loans and business loans as this should help you in choosing the right loan for you or for your business. We would suggest that you always research your options and make use of the information at your disposal. Don’t ever rush into an agreement, or into signing anything. You should be up front and honest with your chosen lender and it is important that you try to read, analyse and learn the terms and conditions of your business or personal loan as best you can.

As a payday loan lender, we do not provide business loans or personal loans. We can however provide payday loans to individuals who fulfil our eligibility criteria. To learn more about our payday loans, please click here. If you like would like to learn a bit more about us here at Wizzcash then you do so on our about us page.