Business loan VS personal loan – it is one of the primary obstacles that new business owners often face and need to conquer to become a recognized brand in the market. The question is even more pertinent to small business owners that normally have fewer options regarding financing. Business owners naturally get involved in business investments, but taking out a personal loan for a business based on sentimental feelings is not always practical.

Personal Loan VS Business Loan: The Actual Difference

Novice entrepreneurs may not clearly comprehend the difference in a comparison between business loan vs personal loan. To put it simply, a business loan is for business purposes and a personal loan is for personal expenses. In reality, the difference is not so simple. Let’s look at each of these loans.

Definition Of A Personal Loan

Personal loans – sometimes known as consumer loans – are loans designed for the borrower to manage personal expenses. Secure personal loans require a guarantor or a collateral as personal assets. If the borrower of a secure loan cannot make repayments, the lender can seize the borrower’s assets or reach out to the guarantor to make the payments. Secure loans are not always the most convenient loans for personal borrowers.

Unsecured personal loans, or signature loans, provide borrowers with a loan based on the lender’s speculation of the borrower’s capability to make successful repayments. Lenders take a huge chance on borrowers in case of unsecured personal loans. Unsecured and secured personal loans both specify the amount of each installment and provide a repayment timetable. The lender and borrower must abide by the terms and conditions of the repayment schedule.

Personal Loan Qualification Criteria

Personal loan qualification criteria are much easier than qualifying for a business loan. Personal loans have a maximum value of $100,000 with a repayment period between one to seven years. Borrowers must either have a good credit score or an excellent credit score (680+ FICO) and a debt to income ratio of approximately 30%.

Definition Of A Business Loan

Business loans have a higher intrinsic value, specific qualification criteria, and meticulous terms and conditions because they are more risky for lenders. Before lenders decide to approve a loan for a business, lenders want to be absolutely certain that their resources are going in the right place to an organization that can pay off the loan. Knowing the reason the organization needs the business loan makes it easier for lenders to make a judgment. Some reasons an organization might consider commercial lending are:

 

• Buying new or high-quality second-hand equipment
• Accumulating factory supplies
• Paying employees’ wages
• Paying utility bills or rent
• Opening a new branch office
• Performing renovation or repairing present machinery

 

This list is not a comprehensive list and there can be many other reasons for a business to take out a business loan. Any expenses that a business makes to achieve business objectives is a justified reason to take out a business loan.

Business Loan Qualification Criteria

Business loan qualification criteria are a complicated process because your personal credit history also affects it. Business loans can be for six months to 25 years, with a maximum borrowing amount of $2 million.

Lenders will require businesses to provide the reason for acquiring the funds before approving a business loan. The organization should have an excellent credit history (640+ FICO) and must be in operation for at least three months. The business should be able to provide bank statements, including tax returns.