Small Business Loan vs. Personal Loan: Which Is Right for Me?
If you are looking to start a new business or fund an existing one, there are numerous loan options to consider. A small business loan and a personal loan are two of the most common options you can consider. But if you have to choose between these two options, which one is right for you?
Let’s compare these two types of loans so that you can select the right one for you.
Small business loans
A small business loan is a loan designed to be only used for financing businesses. In other words, you cannot use this loan for another purpose apart from business purposes. It can be used for developing an existing business or starting a new one.
Due to its importance, several lenders are now providing business loans to small businesses.Some of the most popular lenders for small business loans are credit unions, commercial banks, online lenders, community banks, and peer-to-peer lenders.
What are the advantages of a small business loan?
- It comes with a higher loan limit and a longer repayment term than a typical personal loan.
- It helps business owners to separate their business finances from personal finances.
- If a borrower defaults on the loan, this loan type reduces the risk of personal liability.
What are the disadvantages of a small business loan?
- Only well-established businesses can get small loans from many lenders.
- It is only meant for business purposes.
- In most cases, a business has to present collateral such as real estate, inventory, or business tools.
Personal loan
As the name suggests, a personal loan is a loan that you can use for any personal purpose. Notably, there is no limit to what you can use a personal loan for. Therefore, whether you need a quick fund to settle a personal need, want to consolidate existing debt, or want to finance a small business, you can obtain a personal loan.
Online lenders, credit unions, and commercial banks often offer personal loans to trustworthy customers. Also, many lenders won’t require you to provide collateral before getting a personal loan.
What are the advantages of a personal loan?
- When compared to getting a credit card, a personal loan has a relatively lower interest rate.
- It can be utilized for any purpose you want.
- You don’t have to provide any detailed plan of how you will use the loan.
- The repayment plan of a personal loan is usually fixed; hence, it is easy to plan how you will repay the loan.
- It usually doesn’t require any collateral.
What are the disadvantages of a personal loan?
- In most cases, lenders only allow people with good credit scores to get personal loans. Hence, if you have a bad credit score, you may not be able to get a personal loan.
- Most personal loans feature relatively low maximum loan amounts. Consequently, you may get a loan that isn’t sufficient for your need.
- You may need to pay different types of fees such as loan origination fees.
- If you default on a personal loan, it will reflect on your credit score. Hence, it will affect your personal finances.
Which option is right for you?
Are you in a dilemma of choosing between a personal loan and a small business loan? As shown above, each loan type has some pros and cons. Therefore, it can be difficult to decide the best loan type for you. However, your need and current condition should be considered when choosing between these two loan types.
You should consider going for a small business loan if you:
- Have an established business as this loan type will guarantee that you get low-interest rates.
- Have a riskier business. A business loan ensures that your personal finances don’t suffer if you default on the loan.
- Have a bad credit score. If your credit score is low, most lenders will reject your application for a personal loan. Therefore, a business loan is your only viable option.
However, you are advised to think about applying for a personal loan, if you:
- Need quick cash for business or personal purposes. In fact, some online lenders and peer-to-peer lenders will offer you a personal loan within 24 hours of applying.
- Have a good credit score and a new business.Most lenders will reject applications of new businesses for small business loans. So, instead of waiting for a small business loan, you should just go for a personal loan.
You can check Søk Forbrukslån to find more information on the comparison of these two types of loans and several other unsecured loans in Norway.
In a nutshell, both small business loans and personal loans are good, but they are not suitable for everyone. Therefore, use the information above to understand the differences between a small business loan and a personal loan before applying for any type.