Business loans vs personal loans – which should you choose if you need to finance your business?
When looking for a business loan it can throw up many options of accessing cash from both a business or personal finance solution.
It’s somewhat easier to get finance personally; however, should you dig into your pocket for the business, and is this a tax-efficient way of raising cash? Find out in this guide.
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Business loans – how do they work?
Businesses often turn to business loans for financing for a range of reasons; whether that be growth or cash flow finance, there is sure to be a solution available to you.
Below we outline the different types of business loans available to you and then compare them to personal loans so that you can see the difference.
Different types of business loans
There are many types of available small business loans in the UK. A business loan can be secured or unsecured and available in various terms.
Secured business loans
Secured business loans typically will require you to use an asset from the balance sheet as security. Third-party security, such as a guarantor, may be considered by the lender in addition to other security.
Although property is the most common form of security for secured business loans, other assets such as stocks and shares may also be helpful.
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Unsecured business loans
This allows you to borrow money without using any of your business assets or business-related expenses as security.
You will often need to give a personal liability guarantee that you will repay the loan if the company can’t.
It’s important to note that unsecured business loans usually have higher interest rates than secured loans.
Personal loans – should you use them for your business?
Personal loans (also known as unsecured loans) are when you borrow money from a lender and agree to repay it over a fixed time period with fixed monthly payments. These are usually looked at when the business credit rating is impaired.
In these circumstances, it might be a good option to look at bad credit small business loans as they specialise in helping businesses get credit when they have issues with their credit file.
The lender will charge personal loan interest rates as a fee for lending money. You must repay the loan amount plus any interest.
Personal loans tend to be advantageous because you can get cash immediately but spread the purchase cost across several months or years.
This guide will show you the best personal loans and also discuss whether there are other financing options, such as business credit cards.
If a personal loan isn’t viable then maybe look at fixing your business credit score and applying once it is fixed.
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How business loans and personal loans compare
Business owners who want to grow their businesses may need capital to finance future growth.
What loan should you choose for your business? There are a number of small business loans on the market today.
You may be an entrepreneur with great ideas but lack the capital to launch your business or finance the growth of your existing company.
You might want to apply for a loan in this case. First, you need to understand the types of business loans available and the potential benefits and drawbacks for each.
Your situation may allow you to be eligible for either a personal loan, a small business loan or a personal loan for business.
Some of the more prevalent business financing options are:
- Merchant cash advance
- Invoice finance
- Invoice discounting
- Angel investment
- Crowdfunding
- Short term business loans
- Government business loans
We’ll discuss the pros and cons of bank loans to help you choose which loan will be best for your business growth in the coming year.
Personal
Personal loan lenders offer personal loan to individuals in a fixed amount and at a fixed interest rate for a specific period.
Personal loans are also known as unsecured loans. An Unsecured Loan is a loan that you take from a lender. You promise to repay it over a set period of time in fixed monthly payments.
Unsecured loans are named this because they don’t have any assets to secure them. On the other hand, personal loans are usually for smaller amounts than secured ones.
Some businesses use peer to peer lending if they can find lenders who will loan you the required finance.
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Personal loans: The advantages and disadvantages
Can I get a personal loan to start my own business?
Personal loans are for personal use, however, they can sometimes be used to finance a business.
Some lenders will let you use a personal loan to finance business purposes. They will usually allow for more extraordinary indirect expenses.
Lenders often separate their loan products into personal and business loans. Each type has its eligibility criteria and interest rates.
Personal lending providers will need to know the details of your plans to use the loan with a business plan.
You will not be approved if your business reasons do not meet their lending criteria so it’s best to use a broker to check first.
There are advantages and disadvantages to using a personal business loan
You can use personal loans to finance a business. But what are the pros and cons of using a personal loan for capital injection?
What are the uses of a personal loan?
Personal loans can be used to finance any major purchase. They typically range between £1,000 and £30,000.
A personal loan is helpful whether you want to renovate your house, finance a marriage, or invest capital in your business.
Personal loans are more popular than credit cards because they have lower interest rates.
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Rates for personal loan vs. business loan
Business loan vs personal loan. The interest rates on personal loans are generally higher than those for business loans. The different applications involved is one reason.
Personal loans can be obtained in a matter of days. It takes about a week to process. To mitigate risk, personal loans are often offered at higher interest rates than business loans.
Lenders are less likely to approve business loans because they have more information about the applicant and the eligibility process. This means that lenders are more certain that the company can repay the entire loan amount. Business loan interest rates are generally lower and the repayment period is typically longer.
Business loans
For growing businesses, large business loans can be a way to access capital.
You can choose to have them secured or unsecured depending on your business’s circumstances, including whether you have assets such as physical premises.
Business loans are limited to £5,000,000 mostly, unless you find private funders, such as a private equity fund, who will lend you endless amounts if they think they will get it back.
What are the uses of business loans?
Businesses often use these loans to obtain liquid funds for purchases of inventory, machinery, and supplies.
Many businesses pay these expenses using credit cards. However, there are many situations where business loans can be a viable and preferred alternative to a credit card.
It is impossible to use business loans to pay off existing debts or purchase land or offices.
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Commercial mortgage vs business loan
As we have already mentioned, business loans cannot be used for property purchases. To accomplish this, you will need to obtain a commercial mortgage to purchase a property.
This loan cannot be used for business expenses and is only available to pay the mortgage on office space.
What are the requirements to get a loan for your business?
To be eligible for a loan for your business, there are several requirements you must meet.
- A healthy turnover and profit indicate the ability to keep up repayments
- A loan amount that is appropriate compared to the turnover
- Trade history records
- Credit and payment history
- Histories of business accounts
- Do you have proof that your UK-based business exists?
Businesses that have operated for at least two consecutive years will be eligible to borrow money from most business loan products.
How to decide between a personal loan and a business loan
It is difficult to choose between a personal loan and a business loan. The decision becomes easier when you consider the specific circumstances of your business.
You need to consider a variety of factors in order to make the best business decision based on your circumstances.
First, consider the size of your company and your trading history.
What kind of growth do you want? This will help you decide if a personal loan is sufficient or if you need a loan for more capital in your business.
Timeframes are another critical consideration. What speed do you require the money?
Are the lengthy application and approval processes for business loans counterproductive? A personal loan might be better if you need to finance your business quickly.
A secured loan has the advantage of being able to access more funding and having a longer repayment term. A secured loan for a business will allow you to access a much larger amount of cash than an unsecured personal loan.
The final decision about whether to get a personal or business loan will depend on your individual business circumstances.
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