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Business Loans Are Different Than Personal Loans

By: Kate Samano February 21, 2022

If you’re just starting out as a small business owner, you might be more familiar with personal loans than business loans. Personal loans have exploded in popularity in recent years, and most Americans can easily get one through a simple online application. But a business loan is a different animal altogether than a personal loan. While you may be able to use a personal loan to fund your business, it’s not always the best choice. Business loans have a wide variety of structures and uses, and the right one can put your company on the path to long-term success. Here’s a rundown of the primary differences between personal loans and business loans that you should understand as a business owner.

What Are the Main Benefits of a Personal Loan?

A personal loan is characterized by its ease and flexibility. These days, you can take out a new personal loan with a few keystrokes and clicks of your mouse, with funding showing up in your account in as little as 24 hours. Typically, a personal loan offers terms of up to five years, with amounts reaching $50,000, and that money can usually be used for any purpose whatsoever. If you’re looking for quick cash for your small business, a personal loan may be one of the fastest ways to get it.

Why Should a Business Avoid a Personal Loan?

There are a number of reasons why a personal loan might not be the best option to finance your business. For starters, personal loans require personal guarantees. This means that if your company goes bankrupt, you are personally on the hook to make payments. This alone is enough to steer most companies away from personal loans and into business loans. The typical five-year maximum maturities and $50,000 maximum loan amounts often don’t match well with business purposes as well.

What Advantages Do Business Loans Have Over Personal Loans?

Business loans may not have the open-ended flexibility of personal loans, but they still offer a much broader range of solutions. Business loans can be short- or long-term, for example, with some loans having maturities of 25 or even 30 years. Financing is also available over very short terms, with invoice financing, for example, typically having a duration of just a few weeks. Companies can access much larger loans in the business space, with SBA loans reaching as high as $5 million, and bank loans going even higher for established companies. Business loans can also be secured by the assets of a company, and many don’t require a personal guarantee in the event of default.

Do Business Loans Have Drawbacks?

The biggest negative when it comes to  small business loans is that they can be hard to get, particularly for newer businesses. Most lenders require profitable and/or lengthy operating histories before they’re willing to extend credit to a business, which can put you in a tough situation if you’re just starting out. To qualify for a business loan, you’ll typically have to provide extensive paperwork, from company balance sheets and income statements to financial projections, cash flow statements and your company’s funding history. In some cases, you may still be asked to provide a personal guarantee of repayment, particularly when dealing with the SBA. Business loans also tend to carry restrictive covenants, in terms of how the funding proceeds can be used.

How Can You Choose the Right Loan for Your Business?

The ability to choose from a wide variety of loans is a great benefit to businesses. Specialized loans offer companies the option to pick and choose financing strategies that can optimize their operations. Yet, especially for those new to business, finding the right match can be a challenge.

 

The first step in mapping out what type of financing your company needs is developing a solid business plan. This document will define what your company needs now and how it intends to grow and change in the future. 

 

The second step is to explore what financing options match the needs of your company. At this point, working with an aggregator is the best way that you can examine the full range of what’s out there in terms of financing. Companies like Lendzi offer specialists who can talk you through a wide variety of terms and pricing options from different lenders. If you only check the terms and rates at a single institution, you’re likely to miss the full range of available products that can help your company. 

 

Just like no company can provide the perfect product for all customers, no one lending solution is the right one for all businesses. By investigating all of the possible financing options that can help your business, you’re in the best position to help your company thrive. For some companies, this means selecting a business loan, but for others, it may mean that a personal loan is still the best option. Only by exploring the range of possibilities can you be certain that you’ve made the right choice for your business.

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