A loan is a loan, right?
Well, while the basic concept is the same, there are differences between personal and business loans. As a small business owner, it is important to understand the basics of how each works so you can decide which is best for your business needs.
Where to Go
Major and local banks, credit unions and other financial institutions offer both personal and business/commercial loans, but usually under separate departments. These institutions may offer good interest rates, but major banks reject about 80% of small business loan applications.
For business loans, the Small Business Association (SBA) works with banks and other financial institutions to help provide funding as do local government and trade organizations in states and larger cities. The Federal Housing Administration (FHA) provides insurance to lenders to help consumers get mortgages and other related housing financing. But government agencies do not provide assistance for other types of personal loans.
The number of alternative lenders has substantially increased in recent years for business loans. Lenders, such as BFS Capital, generally have more flexible requirements than most banks, but interest rates are typically higher. There are alternative lenders for personal loans as well, which also charge more interest than standard banks loans.
How Terms Differ
Generally, business loans must be repaid in a shorter time frame than personal loans. Major banks will frequently require collateral for business loans, such as inventory or real estate, while alternative lenders are often more flexible.
The process for a business loan from a bank is very long and detailed with an extensive application. Lending limits are often higher for business loans, compared with personal loans.
However, alternative lenders such as BFS Capital have a much shorter and more flexible process for business loans as it bases approvals on average monthly gross business volume. BFS Capital will make loans ranging from $4,000 to $1 million.
Typically, personal loans are unsecured, but lenders will usually require some form of income verification, along with proof of other assets worth at least as much as the individual is borrowing. The application process is far easier from banks for personal loans and decisions are often made more quickly.
Personal loans have significantly lower monthly payment costs because repayment is spread out over a longer amount of time.
A personal loan doesn’t usually require a guarantor to sign the loan. But for business loans, owners usually have to sign as guarantors. It should be considered carefully as business owners are putting both personal and business assets at risk if the loan is not repaid.
Some business loans from banks will have a call feature where the bank is allowed to call the loan at a specific time; when this occurs, the business must pay the entire outstanding amount of the loan. It would be very rare to have this type of condition in a personal loan.
With a personal loan, once the money has been delivered, there’s generally no further follow-up by the bank as long as payments are made as agreed upon.
However, banks will often require businesses to submit annual financial reports for review, and will request ongoing reporting either on a quarterly or annual basis. Banks are keen on learning about any potential issue that could impact the repayment of the loan.