Personal or business loan: Which one best suits your needs
Business is booming. You just got a major order and need to purchase additional inventory. Or maybe you need to hire an employee. Or you want to spend more on digital marketing.
“Without putting money into the business, you will lose the opportunity to grow at a critical time,” says Jasmin Ganie-Hobbs, Manager, Major Accounts at BDC. “A loan will allow you to take advantage of opportunities while protecting your cash flow.”
But how do you decide whether to get a personal or a business loan? Ganie-Hobbs, who has almost 15 years of experience lending to business owners, provides the following pros and cons to help choose between a business and a personal loan.
Three pros of a personal loan
Lower cost
One big advantage of a personal loan is that it can be less costly than a business loan. “If you have a home equity line of credit already in place, it can be a cheaper way to borrow,” Ganie-Hobbs says.
Speed
While getting a business loan is a lot faster than it used to be, if you have an existing banking relationship or a personal line of credit, a personal loan can be quicker to obtain. “When you need money really quickly, like if you need to make payroll the next day, then it makes sense to use your personal line of credit,” Ganie-Hobbs says.
Ease of access
If your business has not brought in much income yet but you already have a good personal credit score, a personal loan might be easier to secure than a business loan.
Three cons of a personal loan
Not building commercial credit
Your business credit score is separate from your personal score and includes reports from firms that do business with your company, such as suppliers and financial institutions.
“If you regularly use personal loans and lines of credit instead of business financing you will limit your options down the line,” Ganie-Hobbs says.
Lower lending limits
The lending limits for personal loans can sometimes be lower than for business loans. Interest rates can also be high if you have poor credit.
Personal liability
“The main downside of the personal loan is that there is no separation between your personal and business finances,” Ganie-Hobbs says. “If your business defaults on the loan, your personal credit will take a hit and you are personally liable for the loan.”
Bear in mind that business loans can also require personal guarantees.
Three pros of a business loan
Building commercial credit
Taking out a business loan, a business line of credit or using company credit cards will help build the financial credibility of your company.
Better commercial credit can lead to better terms, higher lending limits and additional credit from suppliers. “It’s a lot easier for your bank to lend to you in the future if your business has a record of paying back its debt,” Ganie-Hobbs says.
Filing taxes is easier
Fees, penalties and interest you pay on money borrowed for business purposes or to acquire property for business purposes are deductible expenses when filing your taxes. Keeping your personal and business finances separate will help you trace the use of the money and make it easier for you to file your taxes.
Higher lending limits
The lending limits for business loans can often be much higher than for personal loans. The actual amount will depend on income and the collateral you are offering.
Three cons of a business loan
Incorporation is often necessary
In most cases your company needs to be incorporated to qualify for a business loan. Some lenders, such as BDC, can provide loans to sole proprietors.
Longer wait time
Getting approved for a large business loan can sometimes take a long time. “Smaller business loans can take as little as a few days to arrange,” says Ganie-Hobbs. “But bigger loans can take several weeks.”
Difficult for start-ups to qualify
New businesses can find it hard to get a loan if they haven’t generated much revenue. Entrepreneurs with a solid business plan can apply for a start-up loan. Other options for start-ups include organizations such as Futurpreneur, VC financing or a business credit card.
Which is best for your business?
Ganie-Hobbs says that unless you don’t qualify for a business loan or need the money extremely quickly, a business loan is generally the best option.
“When you’re serious about growing your company and building your reputation with lenders, you need to prove you can qualify for and manage business loans,” she says.
Business owners should prepare in advance before applying for a business loan. “You should have financial statements and projections readily available, along with a business plan, a summary of your management team, a company overview and details of why you need the money,” says Ganie-Hobbs.
Business owners should also discuss credit with their lender sooner rather than later.
“Don’t wait too long before you start building business credit relationships,” Ganie-Hobbs says. “Make sure you look at your cash flow projections and that credit will be available when you need it.”
“The best time to discuss credit needs is early, before you’re pressed for cash.”