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Business loan vs personal loan: Which should I choose?

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Rhiannon Philps

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At a glance

  • A business loan can help you to expand your business and pay for stock or equipment, for example.
  • Personal loans are designed for personal use, but some providers may allow you to use them for business purposes.
  • The Government-backed Start Up Loan is an unsecured personal loan to help those looking to get their business plan off the ground.

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.

 

Business loan Personal loan
They can be used to start or expand a business, pay for stock or equipment, boost cashflow or pay for marketing, for example. They can be used to pay for a holiday, a vehicle, weddings, home improvements or an emergency expense, for example.
They can be unsecured or secured. Some lenders may also ask for a personal guarantee. They are usually unsecured so don’t require any additional security.
Some lenders may offer business loans into the hundreds of thousands, or even millions of pounds. You can usually borrow up to around £25,000, although some lenders may offer up to £50,000.
Typically looks at your business credit file, although some lenders may also check your personal credit history. Lenders will run a credit check on your personal credit file.
You need to provide information about your business when applying, including turnover and your trading history. You need to provide details about your income and financial situation in your application.
May charge a fixed or variable rate of interest. Usually charges a fixed rate of interest.
Some business loans charge certain fees. Many personal loans come without any fees.
The Financial Conduct Authority (FCA) only regulates certain types of business lending, such as loans of up to £25,000 to sole traders. All personal lenders need to be regulated by the Financial Conduct Authority (FCA).

 

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.

What is a Start Up Loan?

A Start Up Loan is a Government-backed personal loan that allows you to borrow between £500 and £25,000 over one to five years to start or grow your business. It’s available if you’re starting a new business or been trading less than 36 months. See more information on the Start Up Loans website.

Pros and cons of using a business loan

  • If you’re a business, you’re likely to have more lenders and loans to choose from than if you only looked at personal loans.
  • You may be able to borrow more with a business loan than a personal loan.
  • If you take out a business loan under your business’ name, you won’t be personally liable to repay the debt (unless you provide a personal guarantee or you are a sole trader).
  • You can start to build up your business credit score, which may be helpful in the future if your business needs finance again.
  • It can be difficult for start-ups and newer businesses with a limited trading history to get approved for a business loan.
  • The application process for a business loan may take longer than for a personal loan.
  • You may need to provide collateral or a personal guarantee with a business loan.
  • Some business loans may not be regulated by the Financial Conduct Authority (FCA).

Compare business loans

See our charts to compare business loans.

Pros and cons of using a personal loan

  • You may be able to apply for a personal loan and receive the money faster than a business loan.
  • If you’re a start-up, your lack of trading history is unlikely to be a problem.
  • Personal loans are regulated by the Financial Conduct Authority (FCA).
  • Many personal lenders won’t allow you to use a personal loan for business purposes.
  • It will affect your personal credit history.
  • You may not be able to borrow as much as you could if you took out a business loan.
  • Repaying a personal loan won’t help you to build up your business credit score.

Compare personal loans

You can compare personal loans and use our loan calculator to see how much you could borrow.

When you're ready, you can also check your eligibility for a personal loan without affecting your credit score.

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.

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

laptop on an office desk

At a glance

  • A business loan can help you to expand your business and pay for stock or equipment, for example.
  • Personal loans are designed for personal use, but some providers may allow you to use them for business purposes.
  • The Government-backed Start Up Loan is an unsecured personal loan to help those looking to get their business plan off the ground.

Moneyfactscompare.co.uk will never contact you by phone to sell you any financial product. Any calls like this are not from Moneyfacts. Emails sent by Moneyfactscompare.co.uk will always be from news@moneyfacts-news.co.uk. Be ScamSmart.

Moneyfactscompare.co.uk will never contact you by phone to sell you any financial product. Any calls like this are not from Moneyfacts. Emails sent by Moneyfactscompare.co.uk will always be from news@moneyfacts-news.co.uk. Be ScamSmart.