Differences between personal and business loans

Whether you’re looking to get a new business idea off the ground or take your existing business to the next level, chances are you’ll need to invest some capital to get things moving. You could be lucky enough to have the money to do this yourself, but for everyone else, you might consider applying for a loan.

In this blog, we explore business loans and personal loans, their differences, and which one is most suitable for your needs.

Business loan vs personal loan — what are the differences?

Although they both allow the borrower access to funds they don't currently have but need, business loans are specifically used to fund business expenses. Most personal loan lenders won't allow the borrower to use their funds for business use, only personal.

Here are four differences between business and personal loans:

1. Size of the loan available

Personal loans are usually limited to smaller amounts of cash, with higher ranges somewhere between £25,000 and £50,000. But business loans give borrowers access to much higher amounts ranging from a few hundred thousand into the millions. How much you can access will depend on the type of business, your financial circumstances and the type of product you apply for.

2. The application process

Personal loan providers only consider the borrower’s financial history and credit score before deciding whether to provide the loan. Whereas applying for a business loan is much more involved, with providers usually asking to access financial and trading history, business plans, and cash flow forecasts before deciding whether to lend you money.

If you don’t have the relevant documentation, i.e., if you’re a start-up business, you might have to rely on your personal credit to apply for a personal loan to fund your business (if the lender allows it).

3. The FCA regulates them differently

The Financial Conduct Authority (FCA) regulates all personal loans, but most business loans are not regulated (except for certain types of businesses applying for £25,000 and less, e.g. sole traders).

Applying for a loan not regulated by the FCA can mean better accessibility and flexibility, with faster access to funds and broader eligibility criteria.

4. Support services on offer

While personal loans very rarely offer support services, business loan providers (e.g. Government-backed lenders) can provide support to the borrower, including business advice and mentoring. This helps them protect their investment and gives you some business guidance.

Are business loans cheaper than personal loans?

Yes, typically, business loans are cheaper than personal loans, with more competitive interest rates and longer repayment periods. In some scenarios you can obtain a business loan that is completely interest free.

This is because the application process is more thorough; the lender has looked into your financial history and cash flow forecasts and deems you less risky as a borrower.

With personal loans, interest rates can be sky-high, particularly if you have adverse credit. As business loans are repaid over a longer period though, you might end up paying more interest in total.

Can I get a personal loan to start a business?

Most lenders do not allow personal loans to be used to start a business, so it’s worth checking with the lender before applying. But you do have the option of applying for a government start-up loan up to £25,000. These are personal loans for business purposes, designed for start-ups that’ve been trading for at least 36 months and cannot secure finance from other sources. You must be 18 to apply and meet the basic eligibility requirements.

Will my personal credit be checked when applying for a business loan?

Not necessarily. If you’re a limited company, your business finances are separate from your personal finances, so they’re only really concerned with your business credit score. But as a sole trader or a start-up with no trading history, the lender will look at your personal credit to determine whether they should lend to you.

Can I use a business loan for personal use?

No, a business loan should be used for business purposes only.

One reason for taking out a business loan over a personal loan is to acquire a larger sum of money to transform your business. So, if you’re looking to secure anything more than £25,000, you're registered as a limited company, and you have the relevant documentation (business plan, cash flow, etc.), you’d be best suited to a business loan, which would allow you to take advantage of the larger pool of lenders, access more competitive interest rates and longer repayment terms.

Are you personally liable for a business loan?

If you’ve applied for the loan as a limited company, you are not personally liable for making repayments unless you sign a personal guarantee. Signing a personal guarantee gives the lender extra assurances that the money will be paid back if your company cannot make timely repayments.

But, if you’ve applied for a loan as a sole trader or a partnership, you will be personally liable for the business loan. Therefore, missing or late repayments will affect your personal credit score.

Can I use a personal loan for business?

You can use some personal loans for business use, but it’s not very common. If you’re just starting up and don’t have any trading history, you may want to take out a personal loan to fund your business.

Some of the other benefits of using a personal loan to fund business activities are that there's usually no collateral required to secure the loan, so you don't have to risk any business assets or sign a debenture, and with less paperwork involved in the application process, you'll have funds quicker.

Remember, not all personal loans can be used for business purposes; some providers may not allow this. If they discover that the loan terms have been breached, they may require you to pay the loan back in full immediately. So it's not worth taking the chance.

Are you looking to secure a business loan to grow your company? Here at Capolona, we help thousands of SMEs explore available loan options using our free self-service comparison tool. Compare business loans here.