There are so many financing options available for business owners; however, the most popular funding options tend to be a personal loan and a commercial loan. Personal loans and commercial loans have different processes and qualification criteria and are normally used for different purposes. Let’s explore what the difference is between a personal and a commercial loan and which one might be right for you.
What Is A Personal Loan?
Simply a personal loan is a type of funding, a lump sum of credit that is given by a lender. A personal loan can be used to fund a large purchase or to consolidate a number of smaller debts. Personal loans can typically have lower interest rates than some credit cards and can be useful for business owners. As an example, Belle has just left her corporate job and wants to open a small floristry business. She knows she needs about $20,000 to get her business started. Belle knows that she won’t qualify for a small business loan so she applies for a personal loan to help her fund the initial expenses.
Pro’s of personal loans
Fast and easy approval: It can be easier to get approved for a personal loan, especially if your business is only a start-up and hasn’t been operating for more than 12 months.
Quick access to funds: As there is minimal paperwork required, the approval process is often shorter and you can have access to your funds quickly.
Unsecured, no collateral needed: Personal loans are mostly unsecured, which means it doesn’t require you to use any collateral to draw the loan.
What Is A Commercial Loan?
A commercial loan, also known as a business loan, is a loan made to a business rather than an individual. It can refer to any loan type made to a business, whether it is short-term or long-term. The loan period can vary from a few months to up to many years; amounts can vary as well with some loans up to $5 million. A business loan is more common for small business owners who don’t want to use personal funds or equity in their business. A commercial loan can fund the purchase of equipment, payroll payments, investment in marketing campaigns, or upgrading of technology. They require you to submit your ABN, financial documents, business plans, and financial projections. The type of loan could be secured or unsecured and mostly will depend on your creditworthiness including credit history and credit score. A secured business loan is secured by some kind of collateral. This could be a property, an expensive piece of equipment, or a valuable piece of machinery.
Let’s look at an example, Frank runs a butcher shop and needs to replace some expensive equipment, he has been operating for 5 years now. The equipment will cost $80,000 and he needs about 15 months to repay this. So Frank takes out a small business loan to fund the equipment with a repayment schedule of 18 months. This gives him a little bit of extra time to repay if he needs it.
Pro’s of Commercial Loans
Building a business’s credit history: Using a business loan instead of a personal loan can help improve the business credit history, this can help with any future loans you may want to take out.
Keeping track of business finances: Separating personal and business finances is important, and having a business loan will help you achieve this. This can save time and money, it could also help you save money with tax deductions surrounding your loan.
Bigger loan amounts: As we saw with the example of Frank, he needed a larger loan amount and because he qualified for a business loan, he was able to obtain the full amount needed. Personal loans tend to be less than $50,000, which might not work for a business.
Low-interest rates: If you qualify for a business loan, you’ll likely get a lower interest rate than you would for a personal loan.
How to Apply For a Personal Loan?
It can be very easy to apply for a personal loan these days; you can normally do the application online. The lender will need to have access to your personal financial information, credit score, and income. As you apply the lender will assess to see your personal capability of repaying the loan. We have included some tips to help in your application process:
- Do your research: Some lenders might not allow personal loan funds to be used for any business purposes. Be mindful that having multiple applications for loans open can impact your credit score. So doing enough research before applying will be necessary for aiding your loan application’s success.
- Have your documents ready: Save time by collating all your documents prior to submitting the application.
- Time to apply: Once you’ve chosen your preferred loan lender you can submit the formal application. You can have access to the money within a few business days if approved.
How to Apply For a Business Loan?
Obtaining a business loan will involve the lender reviewing your personal and business credit score, business financial statements, and how you intend to repay the loan. If you are applying for a secured loan they will also need information about the collateral you intend to use.
Luckily today there are many options available to find your lender of choice, including banks, and online lenders. We have included some tips to help you in your application process.
- Do your research: You should take the time to see which lender best suits your business needs. Each lender will have different requirements and terms available for you. Their application processes can differ as well. A traditional bank may have a lengthy process in place with lots of extra documentation required, whereas online lenders tend to have quick automated processes in place.
- Have your documents ready: Having your financial documents ready when you apply will save you time and help you have loan application success.
- Time to apply: Now that you have decided on your preferred lender, and you have your documents ready to go, you are ready to apply. Good luck with your loan application!