How Are Business Loans Different From Personal Loans?

How Are Business Loans Different From Personal Loans?

If you need capital to operate your business, it may be possible to acquire it from a friend, family member, or financial institution. While business loans are similar to personal loans in many ways, there are also several key differences that you should know about before applying for financing.

Collateral

Collateral is anything of value that can be used to secure a loan. Traditionally, banks ask you to provide 20% of the loan with your own money, but you can also secure a small business loan with personal assets such as a house or car. You could also secure the loan with equipment that the company owns or land that it has sufficient equity in. Business lenders typically require collateral because loan amounts are usually $10,000 or more. Therefore, they want to know that they can get their money back if your company defaults on the loan. As a general rule, personal loans won’t require any collateral. Instead, a lender will rely on your credit score or some other objective measure to determine whether you are creditworthy. However, it may be possible to use collateral to get a better interest rate on a personal loan.

Credit Requirements

Personal loans often don’t consider credit rating as part of the approval process. However, if a lender doesn’t require a credit check, there is a good chance that you will pay an extremely high-interest rate. When you apply for a business loan, the bank or financial institution that you get the loan through will likely check your credit score as well as your company’s credit score. An exception may be made for factoring or similar types of loans that are secured with collateral.

You May Not Be Personally Responsible for a Business Loan

If a business loan is made out to the company itself, you may not be held personally liable if it defaults on its obligation to the lender. Instead of losing your home, car, or other personal assets, a creditor would only be able to go after corporate assets in an effort to recoup its money. However, an exception could be made if the corporate veil is pierced or you personally guaranteed a loan made directly to your business.

While personal loans can be used to fund a business, they are fundamentally different than business loans or lines of credit. If you have any questions about how to obtain financing, it may be worth speaking with a loan officer at your preferred bank or credit union.

Need funding for your business? Apply now!

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