Being a small business is tough in itself, and then you need money… and it can get tougher. So here’s how to use the bank’s money to grow your business.
Business Loan vs. Personal Loan: What’s the Difference?
Business Loan: This loan is specifically designed for business expenses and lenders will typically look at your business’s financial health, including revenue, profits, and business credit score. Some lenders may check your personal credit as well, so just be aware of this.
Personal Loan: A personal loan is borrowed in your name and can be used for just about anything, including business expenses or even paying for a sweet fifteen (but don’t do that – that’s dumb).
The lender will assess your personal credit score, income, and overall financial situation when deciding whether to approve the loan. AND if you default, it will look bad on your personal credit score.
When to Consider a Business Loan
If You Need a Larger Amount of Money: Business loans often allow you to borrow more than personal loans. If you’re looking to make a significant investment in your business, like buying equipment or expanding operations, a business loan might be your best bet.
If You Want to Build Business Credit: Taking out a business loan and paying it back on time can help you build your business’ credit, which can be helpful for future financing needs. Strong business credit can lead to better loan terms and lower interest rates in the future.
If You Want to Keep Personal and Business Finances Separate: Keeping your business and personal finances separate is a smart move for a lot of reasons, including tax purposes and protecting your personal assets. A business loan helps maintain that separation.
When to Consider a Personal Loan
On the other hand, a personal loan might be the better choice if:
- You Have a New or Small Business: If your business is still young or doesn’t have a strong credit history, it might be easier to qualify for a personal loan. Lenders often require more established business credit for business loans.
- You Need Funds Quickly: Personal loans can often be processed faster than business loans, which can be helpful if you need money quickly to cover an unexpected expense.
- You’re Borrowing a Smaller Amount: If you only need a small loan, a personal loan might be more straightforward and easier to manage. Just be aware that your personal assets and credit are on the line.
- Evaluate Your Business’s Needs: Ask yourself: Where do I see my business going? What investments am I thinking of making? For example: adding employees, marketing, or buying materials needed by the business. How much is that estimated to cost? This can guide your decision on whether you may need a loan, line of credit, personal loan, or just a credit card.
- Check Your Credit Scores: Take a look at both your personal and business credit scores. In order to have a business credit score, you need a tax id number that is separate for your business.
- Take out a business line of credit: I’m a big believer in having liquidity – meaning having money to use in case you want to pounce on an opportunity or have an emergency in your business. A line of credit allows you to just have the money available but you don’t’ have to take it out or use it.
- Consult with a Financial Advisor: If you’re still unsure which route to take, consider talking to a financial advisor who can help you weigh the pros and cons based on your specific situation. Sometimes an outside perspective can provide the clarity you need.
Remember, I’m here to help guide you through these decisions. If you have any questions or need more personalized advice, reach out HERE
Let’s make sure you’re set up for success—both in business and in life!
Some other questions you might have:
Can you take out a personal loan for a business?
Yes, you can use a personal loan for business expenses, but keep in mind that you’re personally responsible for repaying the loan, and it can impact your personal credit.
Can a business loan be used for personal use?
No, business loans should only be used for business-related expenses; using them for personal purposes could violate loan terms and lead to legal issues but to be honest no one sees what you actually use it on, sooooo….
How much would a $5,000 personal loan cost a month?
The monthly payment depends on the interest rate and loan term; for example, at a 5% interest rate over 3 years, it would be around $150 per month.
Do business loans hurt your credit?
Business loans can impact your personal credit if you personally guarantee the loan, or if the business defaults and the lender reports it to credit agencies.