Do you need to borrow money to finance a business project and can’t decide between choosing a business or a personal loan? Though logically, a business loan may seem to be the best option if you need to invest in a business, personal loans can also be handy means to fulfill this purpose. But, first, you should understand the essence of each loan type and figure out the advantages and disadvantages of each type of loan.
What is a Personal Loan?
A personal loan is borrowed money lent in an amount at a fixed rate that should be paid by fixed monthly payments (interests + a portion of principal amount) over a set period.
The Pros and Cons of Personal Loans
Pro: Personal Loans may be used for millions of purposes: from financing a business project to organizing a pricey event, these loans may be a good option.
Con: Personal loans do not always have low interest rates especially if you have bad credit.
Pro: Due to their online availability, you can get the needed money very quickly and easily.
Pro/con: Personal loans can build and destroy your credit score. Your monthly payments are reported to the credit bureaus (Equifax, Experian, and TransUnion). Regularly making monthly payments, you will increase your credit score as payment history makes up 35% of your FICO score. Though it may be considered as an advantage for the borrowers who want to build credit, at the same time, any late payment or non-payment will have a negative impact on your score, and you will end up as a “risky borrower”.
What is a Business Loan?
A business loan is money lent to a commercial entity and is used to cover expenditures that the company is unable to handle. Business loans are an integral part of the business world as they help entrepreneurs build and develop their companies. Here are the pros and cons of business loans:
Pro: The business loans help business owners facing cash flow troubles to stay afloat. Business loans are aimed at covering business expenses as required: paying salaries of employees, buying new equipment, launching new projects, etc.
Con: Business loans are not so easy to get. Companies applying for a business loan have to present a financial statement that includes a balance sheet, income, and cash flow statements to prove their creditworthiness.
Pro: Though a business loan is short-term, you can roll it over (extend the life of the loan).
Con: In some cases, a personal guarantee may be required to get qualified for business loans.
The Big Difference Between Personal & Business Loans
As mentioned above, personal loans may be used for any purpose, including financing your business. Then, many of you may wonder why the borrowers take a business loan? The answer is “liability.” In the case of taking out a business loan and having difficulties in paying it back, it is only your business that takes responsibility for any credit default. This being said, if your business goes bankrupt, the other assets owned by you, as well as your credit score, remain protected. Personal loans, on the contrary, put all the liability of paying back the loan on your personal finances, and any credit default will be mirrored in your credit score.
To sum up, each of these loan types has its pros and cons, and before jumping into one or the other option, you should consider your particular case, not forgetting about all the payoffs and repercussions.