Small business owner thinking about his finances

The Differences Between Personal and Business Loans

3 min read • Dec 06, 2019 • Grant Olsen

Whether you’re starting your first business venture or expanding on a business that’s been in your family for 3 generations, you’ll likely need to use debt financing to acquire the necessary capital. There are myriad different loan options to choose from, but they can easily be separated into 2 main categories: personal loans and business loans.

When it comes to understanding the difference between personal and business loans, the most important differentiator is how the qualification process works. With a personal loan, the lender will look at your individual finances. If you have a solid credit score and consistent income, you’ll stand an excellent chance of getting approved.

For business loans, your business enters the picture in a big way. A lender would scrutinize factors like the income of your business and the length of time it has been in operation.

Of course, there are differences between personal and business loans that extend beyond the qualification process. Personal loans usually don’t require a guarantor to sign for the loan, while business loans often do. Also, business loans usually have shorter repayment periods and higher monthly payments. Finally, business loans will offer you the highest lending limits.

While these differences ensure that personal and business loans are separate entities, there’s more common ground between them than you might expect. For example, your personal finances are usually still relevant when you’re seeking a business loan because it helps lenders predict whether you’ll repay the money you borrow and how quickly you’ll do it. Your score will also play a major role in determining the interest rate on a given loan and how long the repayment will be. Better scores result in more favorable rates and terms, potentially saving you thousands of dollars over the life of the loan.

But what if your personal score isn’t impressive? While a lower score can definitely hinder your pursuit of many personal and business loans, that doesn’t mean you’re out of options. A few high-quality financing products base their qualifications on other elements, making them ideal for those with spotty personal financial histories.

  1. ACH loans
    These loans are lean and mean. They connect you with money much faster than usual, but plan on the amount being lower. Additionally, you’ll pay for that convenience in the form of higher interest rates.With an ACH loan, payments are taken right out of your checking account. So lenders will pay close attention to the finances of your business. If your average daily balance is solid, then you can get approved even if your personal credit isn’t impressive.
  1. Business lines of credit
    With this type of financing, you get access to a predetermined amount of cash that you can spend whenever you deem necessary. In this respect, it’s similar to a credit card. Any time you use some of the money, you repay it and once again have access to the full amount.For businesses with $50,000 or more in annual revenue and credit scores higher than 559, getting approved usually isn’t too difficult. The available credit ranges from $1,000 all the way up to $500,000. And there aren’t many limitations on how you use it, so it’s perfect for the variable needs entrepreneurs often face.
  1. Merchant cash advances
    Funding in as few as 24 hours, a merchant cash advance is among the fastest options out there. Literally, you can get your money in as much time as it takes glue to dry. The amounts can be anywhere between $5,000 to $200,000.This form of financing lets you borrow against the future earnings of your business rather than your personal or business credit history. As long as your business brings in $2,500 or more in monthly credit card transactions, you will stand a good chance of being approved by the lender.

Regardless of the financing option you choose, it’s always a good idea to bolster your personal credit score because it shares so much DNA with your business credit. Start by setting up automatic payments whenever possible. This practice will help reduce the risk of human errors that result in late payments and score decreases.

Also, be proactive in your credit monitoring. About 1 in 5 people have errors on their reports, and they probably won’t ever get resolved unless those individuals decide to take action. Anytime you can take steps to improve your score, you’ll be rewarded with access to more loan options, lower interest rates, and better repayment terms.

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Grant Olsen

Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble." He has a B.A. in English from Brigham Young University.