Business loan vs personal loan: Which should I choose?

If you’re searching for funding for your business, a loan could be a suitable option.

Many established businesses that have been trading for several years may choose a specific business loan or a more specialist form of business finance to help them meet their goals.

However, sole traders and those just starting out on their business journey may find it more difficult to get a traditional business loan and may be wondering if they can use a personal loan instead.

Read on to find out the key differences between a business loan and a personal loan to help you decide which would be more suitable for your circumstances.

What is the difference between a business loan and a personal loan?

As the names suggest, the main difference between a business loan and a personal loan is that one is used for business purposes and the other is for personal use.

But, in addition to the purpose of the loan, there are some other differences to be aware of.

Can I use a personal loan for business?

It may be possible to find a personal loan that you can use for business purposes, but this will depend on the provider and your situation.

Many personal lenders state that you can’t use one of their personal loans for any business-related activities.

But, in certain circumstances, some lenders may allow you to use a personal loan for your business. For example, they may accept applications from sole traders but may not accept applications from limited companies.

If you’re not sure if you can use a personal loan for business purposes, check with the lender. It’s important that you don’t lie about how you intend to use a loan on an application because, if you’re found out, you may need to repay the loan in full immediately and could face other consequences.

Bear in mind that, even if you intend to use a personal loan to fund your business activities, the lender will use your personal circumstances and credit score to make a decision on your application. You will also be personally liable to repay the loan.

It’s worth noting that the Start Up Loans offered by British Business Bank are unsecured personal loans.

Is it cheaper to get a business or personal loan?

It’s difficult to say whether a business loan is cheaper than a personal loan as the rate you are charged depends on a range of factors, including:

• your personal or business credit score
• how much you want to borrow
• the term you want to repay the loan over
• your personal or business’s financial situation
• which lender you borrow from.

You can compare interest rates on our personal loan charts and our business loan charts.

Does a business loan impact your personal credit score?

In some cases, a business loan can affect your personal credit history. For example, if you’re a sole trader, your personal finances and business finances are considered one and the same.

As a result, when a lender runs a credit check as part of the application process, this will be recorded on your personal credit file. Additionally, if you’re approved for a loan, your repayment history and any defaults will also appear on your personal credit history and could affect your score.

If you have a limited company, which separates your business finances from your personal finances, a business loan is unlikely to have much of an impact, if any, on your personal credit history.

However, depending on your individual situation, some lenders may check your personal credit history as well as your business credit history as part of the application process. This is more likely to happen if you’re a relatively new business with a limited business credit history.

It’s worth bearing in mind that some lenders may ask for a personal guarantee when you apply for a business loan. This means you personally agree to repay the loan if your business fails or is unable to meet repayments, which could have consequences for your personal credit score.