Personal Business Loan vs. Commercial Business Loan
When it comes to starting or expanding a business, one of the biggest challenges is securing financing. There are various types of loans available in the market, but choosing the right one for your business can be daunting. According to the Small Business Administration, around 80% of small businesses use financing to fund their operations. Two popular options for financing are personal business loans and commercial business loans.
In this blog, we will discuss the differences between these two types of loans so you can make an informed decision for your business.
Personal Business Loan
A personal business loan, as the name suggests, is a type of loan that relies on the borrower's personal credit and income rather than business credit. It is an unsecured form of financing, meaning no collateral is required to secure the loan. Personal business loans are usually smaller in amount compared to commercial business loans and have shorter repayment terms.
Pros:
- Easier to Qualify:
One of the main advantages of a personal business loan is that it's relatively easier to qualify for compared to other types of loans. Since personal credit and income are taken into consideration, individuals with good credit scores and stable incomes have a higher chance of getting approved.
- No Collateral Required:
As mentioned earlier, personal business loans are unsecured, so you don't need to provide any collateral to secure the loan. This can be a huge advantage for individuals who may not have assets to use as collateral.
- Faster Approval:
Since personal business loans are based on an individual's credit and income, the approval process is usually faster compared to other types of loans that require extensive documentation and evaluation of business financials.
Cons:
- Higher Interest Rates:
Since personal business loans are unsecured, lenders consider them riskier and charge higher interest rates. This means that you may end up paying more in interest over the life of the loan.
- Limited Loan Amount:
Personal business loans typically have lower borrowing limits compared to commercial loans, so they may not be suitable for larger business expenses.
Personal Business Loan Eligibility
To qualify for a personal business loan, lenders will consider your personal credit score, debt-to-income ratio, and employment status. Generally, a good credit score of 650 or higher is required to qualify for a personal business loan. It is the borrower's responsibility to ensure that they have a good credit score before applying for a personal business loan.
The following are the criteria that lenders usually consider for personal business loan eligibility:
Credit Score: As mentioned earlier, a good credit score is crucial when it comes to qualifying for a personal business loan. Lenders usually look for a minimum credit score of 650, but some may require higher scores.
Debt-to-Income Ratio: This ratio determines your ability to repay the loan based on your current debts and income. A lower ratio means you have a higher chance of getting approved for a personal business loan.
Employment Status: Lenders will also consider your employment status to determine your ability to repay the loan. Having a stable job or a consistent source of income can increase your chances of getting approved.
Commercial Business Loan
A commercial business loan is specifically designed for business purposes and requires collateral to secure the loan. It is a secured form of financing, which means that in case of default, the lender can seize the assets provided as collateral to recover their losses. Commercial loans have longer repayment terms and larger borrowing limits compared to personal business loans.
Pros:
- Lower Interest Rates:
Since commercial loans are secured with collateral, lenders consider them less risky and offer lower interest rates compared to personal business loans.
- Higher Borrowing Limits:
Commercial loans have higher borrowing limits, making them suitable for larger business expenses such as purchasing real estate or equipment.
- Longer Repayment Terms:
With commercial loans, businesses have more time to repay the loan, which can help with cash flow management.
Cons:
- Strict Eligibility Criteria:
Unlike personal business loans, commercial loans have strict eligibility criteria that businesses must meet to qualify. This may include providing detailed financial statements and demonstrating a good track record of revenue and profits.
- Collateral Required:
One of the major downsides of commercial loans is that they require collateral, which can be a barrier for small businesses or individuals who don't have assets to use as collateral.
Commercial Business Loan Eligibility
To qualify for a commercial business loan, lenders will consider the following criteria:
Credit Score: Just like with personal business loans, a good credit score is important for qualifying for a commercial loan. However, for commercial loans, lenders may also look at the credit history of the business and its owners.
Collateral: As mentioned earlier, collateral is required to secure a commercial loan. The value of the collateral should be equal to or greater than the loan amount.
Business Financials: Lenders will evaluate the business's financial statements, including revenue, expenses, and profits, to determine its ability to repay the loan.
How to Get a Personal Business Loan to Start a Business?
There are major disadvantages to going for a personal business loan, one of which is the limitation on the loan amount. However, if you're starting a small business and don't need a large amount of funding, then a personal business loan can be an option worth considering. To get a personal business loan to start a business, follow these steps:
Check your credit score:
A good credit score is crucial for qualifying for a personal business loan. If your credit score is low, work on improving it before applying for a loan.
Determine how much funding you need:
Before approaching lenders, determine the amount of funding you need for your business. This will help you narrow down your options and avoid overborrowing.
Research lenders:
Look for lenders that offer personal business loans and compare their interest rates, fees, and eligibility criteria. This will help you find the best deal for your loan.
Gather necessary documents:
Most lenders will require you to provide documents such as bank statements, tax returns, and proof of income to support your loan application. Make sure to have these ready in advance.
Apply for the loan:
Once you've found a suitable lender, submit your loan application along with all the necessary documents.
Wait for approval:
The lender will evaluate your application and make a decision on whether to approve or deny your loan request. If approved, you'll receive the funds within a few days.
Business Loan VS Personal Loan
When it comes to financing your business or wanting to get a startup business loan, there are two main options available – personal loans and commercial loans. While both serve the same purpose of providing financial aid, the terms, conditions, and eligibility criteria differ significantly.
The difference between business loans and personal loans lies in the borrower's identity, purpose of borrowing, interest rates, repayment terms, and eligibility criteria.
Business Loan VS Personal Loan | ||
Borrower's identity | The borrower is a business or an individual representing a business. | The borrower is an individual. |
Purpose of borrowing | Solely for business purposes, such as purchasing equipment or real estate. | It can be used for personal expenses and business expenses, including starting a small business. |
Interest rates | Lower interest rates, as the loans are secured with collateral. | Higher interest rates, as the loans are unsecured. |
Repayment terms | Longer repayment terms, making it suitable for larger borrowing amounts and helping with cash flow management. | Shorter repayment terms, making it suitable for smaller borrowing amounts, may cause strain on cash flow. |
Eligibility criteria | Strict eligibility criteria, including providing detailed financial statements and demonstrating a good track record of revenue and profits. | Easier eligibility criteria, with a focus on the borrower's credit score and income. |
Conclusion
Choosing between a personal business loan and a commercial business loan depends on your specific needs and financial situation. If you are starting a small business and need a smaller amount of funding, a personal loan may be suitable. On the other hand, if you're looking for larger funding and have assets to use as collateral, a commercial loan can offer lower interest rates and longer repayment terms.
It's important to carefully consider your options and choose the loan that best fits your business needs. Remember to always compare lenders and their terms before making a decision.
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