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.
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). |
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.
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.
See our charts to compare business loans.
You can compare personal loans or 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.
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:
You can compare interest rates on our personal loan charts and our business loan charts.
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.