Business owners try and keep their finances separate from their business. When a small business tries to secure a loan, the lender will often require the borrower to personally guarantee the loan. This means that even though a business is a separate legal entity, the owner will be held personally liable for the loan.
Why?
Lenders don’t want to take on too much risk. As a business matures and establishes a financial history and credit history, the owner will not have to personally guarantee loans any longer.
Business vs. Personal Loans
Both types of loans, business and personal, will provide a borrower with money that may be in the form of a line of credit. Depending on what you qualify for, a line of credit may be more beneficial because it allows for a revolving credit line that can be borrowed against when needed.
Similar in nature, business loans are meant to finance a business’s operations, and these loans will help the business build its credit history for future loans.
Business loans are scrutinized more than a personal loans because:
- Businesses may not have a strong credit history
- Businesses take out larger loans
Applications for a business loan are extensive, and it may be difficult for a new business to secure a loan. Strict terms on how the loan can be used are written into the loan’s contracts, which will often include some form of collateral in the event that you default on the loan.
Personal loans are meant to fund personal purchases, but that doesn’t mean that a lot of small businesses don’t take out personal loans.
A personal loan is one that is easier to secure and may not require collateral, depending on your credit score. There’s also the benefit of a personal loan not having high-interest rates, which are common with business loans.
Lenders can sue a personal borrower for the assets they own, but when a business takes out a loan, they can sue the business and take away assets to recoup their debt.
Business Loans are Ideal
It’s almost always a better option to take out a business loan over a personal loan. But only 26% of loans are approved. This means 3-out-of-4 loans will be declined. Your business may not be able to find a suitable loan for your needs.
And when this happens, a personal loan may be the only option left.
Personal loans can be taken out and the funds may be used for your business, but there’s also the risk that the funds will be your responsibility. If you fail to make a payment or satisfy the loan, you will be held personally liable for the debt.
It’s a risk that a lot of small businesses take because they have no other option available to them.
You’ll want to make sure that you also limit your risks and only take on a personal loan when it’s a necessity to keep your operations afloat or to advance your business. A time when this may be acceptable is when you need to fulfill an order and know you will have an invoice paid to satisfy the loan shortly after. In this scenario, your risk is low, and taking out a personal loan may make sense.