Business Loan vs Personal Loan: When you’re an entrepreneur, there may come a time when you will need to consider the option of taking out a loan.
Two of the most common options are business loan and personal loan. However, deciding which is the best for you is not always as simple as it sounds.
It can be easy to get overwhelmed with all the information on different types of loans. So what’s the difference?
The purpose of this article is to offer a comparison of business loan vs. personal loan. This will help you make an informed decision about your situation.
How Do Business Loan Work?
A business loan is an investment in your business that allows you to buy assets, invest in new projects and grow your business.
A business owner may need a business loan when they are starting. It also applies if they have been operating their business for some time but want to expand into new markets or start investing in more asset-heavy ventures like purchasing real estate.
Businesses are always looking for the right loan to meet their needs, and various options exist. These can be found in equipment financing, term loans, and invoice financing.
Business loan can be short-term or long-term. Short-term business loan, such as business lines of credit, can be great for business owners who need access to cash on an ongoing basis and want to keep their monthly payments low.
Long-term business loan are suitable if you plan to purchase a business asset that will last for years.
Business owners should shop around for business loan options before settling on one lender. Some lenders offer enticing teaser interest rates but higher interest rates after the initial period end.
Before applying for a business loan, you should understand how they work first. Also, know what exactly you can do with a business loan once you receive one.
Going into this without proper knowledge about business loan can lead to business failure and even business bankruptcy.
Commercial banks are a great source of business loan. But business owners should also explore alternative financing avenues such as invoice factoring or peer-to-peer lending. You never know what you will find out there that can help your business grow.
How Do Personal Loan Work?
A personal loan is a type of loan used for personal reasons. For example, people may use them to buy things like cars, travel and home improvements.
Personal loans are typically short-term loans with fixed interest rates. You can use them to consolidate debt, take out a loan for business purposes, or help make big-ticket purchases.
Consumers usually pay the loan back in fixed installments over a certain period. The repayment terms vary depending on whether the loan is unsecured or secured.
A personal loan for a business may have features like a fixed interest rate, deferred payments, and repayment over several years. Personal loan are generally repaid within 3-5 years.
Personal loan are popular because they allow people to borrow money without requiring any collateral.
The Personal loans are also a good business loan alternative for business owners who own collateral but may not want to sell it.
A business owner with limited funds in their business bank account could use personal loan. They’ll cover business expenses until the business generates enough cash flow and profits.
However, when you compare business loan interest rates vs. personal loan interest rates, you’ll find that personal loan have higher rates.
Types of Business Loan:
There are several business loans every business owner should be familiar with. They include:
Term Loans
Term loans can help business owners who need to access capital in the short term without needing any collateral. The terms aren’t too long, typically ranging from one year to five years but sometimes up to 10 years.
These business bank accounts may come with fixed or variable rates and often include mandatory amortization features.
That will require you to pay a fixed percentage of the loan amount each month until it is paid off completely.
Asset-Based Business Loan:
Businesses may also raise business cash by taking out an asset-based business line of credit (LOC). Instead of requiring collateral, lenders use business assets that can be liquidated in case of business default.
The business assets are then used as collateral and offset against the business line of credit. Thus, they provide business owners with business cash based on the value of business assets minus any business loan balances.
An asset-based business line of credit helps small businesses gain working capital without selling the business property.
But they have one disadvantage. Business cash must be paid back even if net business income goes down. So you’ll need to have a strategy in place before applying for an asset-based loan.
Merchant Cash Advance (MCA)
Businesses that run their operations on credit cards may want to look into business cash advance business loan.
A business owner could receive a business cash advance directly from an upfront business loan payment to their business account.
The funds will pay off credit card balances so you can start building your business credit again.
You have options when it comes to paying back the business loan. You’ll be able to pay it back monthly or forking over chunks at different times during the repayment period.
Business Lines of Credit (LOC)
Business lines of credit (LOCs) are similar to personal lines of credit, but they’re geared toward small businesses. They’re loans that business owners can use to make business purchases.
Business lines of credit are usually unsecure business loans. And that means business owners don’t have to put the business property up as collateral.
However, LOCs come with interest rates that may be higher than other business loan products. Businesses will also need a good business credit score to qualify.
Equipment Financing & Leasing
Business owners who need business equipment may want to consider business equipment leasing as a finance option.
They’ll help you raise business capital to purchase equipment used in your business operations. The amount of business cash will depend on how much the equipment costs and how you’ll use the equipment.
Types of Personal Loans
Using personal loan as a business loan alternative is one of the best ways to raise business cash if you don’t have any business assets to give.
Personal loan can be classified in many ways, including unsecured, secured, and variable-rate. These classifications depend largely on your credit score and the time of repayment. Below we’ll detail the types of personal loan.
Secured Personal Loan:
These loans require business owners to pledge business property as collateral.
With a secured personal loan, you can borrow against your car or other assets to get cash for emergencies.
This type of loan is less risky than unsecure loans because lenders know that they will get the payment. If they default on payments thanks to collateral.
Secured loans typically come with lower rates since it’s assume there will be no outstanding debt even when borrowers default on their monthly repayments.
Unsecured Personal Loan:
If your credit isn’t great enough or you don’t have collateral to secure a loan but still need cash immediately, look into unsecured personal loan. These loans have higher interest rates because they aren’t secure by assets that can be sell if you fail to pay back the money.
Fixed-Rate Loans
Fixed-rate personal loan are simple, but you’ll pay higher interest rates than with variable-rate loans. Your interest rate won’t change during the life of your loan unless there is a change in the index use to calculate your rate.
Variable-Rate Loans
Variable-rate personal loan are more common than fixed-rate loans. The exact interest rates always change so you’ll get to know the exact interest rate when your loan gets approval.
In addition, most adjustable-rate loans have caps that limit how much they can increase or decrease over a set number of years after your initial loan term.
Debt Consolidation Loans
If you’re struggling to repay your debts, consider getting a debt consolidation loan. These loans are available from credit unions and banks, and they combine all of your existing loans into one.
The interest rate is fix over the life of the loan, so you’ll have more manageable monthly payments.
Personal Line of Credit
A personal line of credit gives you instant access to funds when you need them. You can withdraw the entire amount at any time or in smaller amounts over some time.
Your interest rate will be variable initially, but it could switch to a fixed rate later on if your bank allows it. If you have a line of credit, remember that banks may allow additional borrowing only up to the amount available in your account at that moment.
You can visit Plenti for more information about personal loan.
Start a Business With a Person Loan vs Business Loan
Business owners should consider getting a personal loan vs business loan based on the amount of business capital needed, business credit score, business type, and business collateral availability.
Regardless of your borrowing decision, it would help if you understood how these loans work before signing a contract with the lender.
We hope that this business capital guide helps business owners to understand the business loan vs personal loan options better and make an educated business capital decision.
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