Business loan vs personal loan: which is better for your startup?

All you need to know to help you decide which loan is right for your startup.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Source: Getty Images.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

If your business is just starting out, it can sometimes be difficult to secure funding from traditional lenders.

Business loans typically come with requirements that, as a startup, your business may fail to qualify for. However, some personal loans have restrictions on whether or not you can use them for business purposes. It can be hard to know which option to go for.

Don’t worry. We’re here to guide you through all you need to know to help you decide whether a business loan or a personal loan is right for your start-up.

Business loan

The biggest issue when it comes to start-ups and business loans is the eligibility criteria. Business loans, like all loans, are given based on affordability and a credit check. The challenge for a start-up business is that they have no proven track record and no credit history as yet. Which makes accessing funding that bit harder.

However, there are business loans available for startups. For most of them you will need to provide a business plan and a cash flow forecast as part of the application process.

While eligibility and access may be a downside to choosing a business loan for your start-up, there are advantages to going down the business loan route:

  • They typically allow you to borrow a larger amount than a personal loan. If you are trying to get your business out of the starting blocks, this could be a distinct advantage.
  • They are specifically created for business users and have a range of different financing options. You may find a merchant cash advance or invoice financing will suit your funding needs better than a traditional loan.
  • They typically come with some sort of support. While personal loan lenders aren’t typically interested in what you do with the money as long as you repay it, with a business loan, support is often an essential part of the service – especially when it comes to small businesses or startups with little experience.
  • Taking out a business loan means that your business name can start building its own credit history, which could make accessing additional funding easier in the future.

Personal loan

A personal loan is just that, personal. So the largest issue that you may come across if you are considering taking one out to fund your startup is that some lenders specify that the loan should be for personal use only. And if you are found to have used it for business purposes, the lender may call in the loan and demand you repay it in full straight away.

However, if you do find a lender that will allow you to use a personal loan for business, the big advantage is that you won’t have to provide information regarding the state of your business. The application will therefore be less involved than if you chose to apply for a business loan.

Accessibility is one of the few advantages that personal loans have over business loans when funding your startup. Here are a few of the disadvantages you should also bear in mind:

  • You, the individual, will be personally liable for the loan. As it is a personal loan, it will be your name and your credit history that will be taken into account, not the business’s. And it will be your credit rating that is impacted if the business is unable to repay the loan.
  • Personal loans are typically smaller than business loans. If you are looking for a larger injection of cash, it may be better to consider other funding options.
  • There is less support when it comes to a personal loan. With a business loan you can expect some sort of mentoring or advice as part of the package, but if you are taking out a personal loan this is unlikely to come as part of the service.

Startup loans

If a business loan or a personal loan doesn’t feel like the right fit, maybe consider a startup loan. This is a government-backed personal loan available to individuals looking to start or grow a business.

The loan is unsecured, and amounts range from £500 to £25,000. All owners or partners can individually apply for up to £25,000 each, with a maximum of £100,000 available per business. In addition to the finance, successful applicants will also receive 12-months of free mentoring.

As part of the process, you, as an individual, will be required to have a credit check and there will be a personal affordability check undertaken before your application is approved. In addition to that, you will be required to provide a business plan and cash flow forecast. However, if you are new to this, you can find free templates and guides at the website.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

MyWalletHero, Fool and The Motley Fool are all trading names of The Motley Fool Ltd. The Motley Fool Ltd is an appointed representative of Richdale Brokers & Financial Services Ltd who are authorised and regulated by the FCA, and we are permitted in this capacity to act as a credit-broker, not a lender, for consumer credit products (our FRN is 422737). The Motley Fool Ltd does not have permissions for, and does not advise on, investment products and services, but may provide information on investment products and services.

The Motley Fool receives compensation from some advertisers who provide products and services that may be covered by our editorial team. It’s one way we make money. But know that our editorial integrity and transparency matters most and our ratings aren’t influenced by compensation. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. The Motley Fool has recommended shares in Lloyds, Tesco and Barclays.

More on Personal Finance

Note paper with question mark on orange background
Personal Finance

Should you invest your ISA in a model portfolio?

Which model ISA portfolios offer both high performance and low fees? Hargreaves Lansdown, Interactive Investor and AJ Bell go under…

Read more »

Economic Uncertainty Ahead Sign With Stormy Background
Personal Finance

Is it time to exit emerging markets investments?

Investors may well be sitting on losses from emerging markets funds. Is it worth keeping the faith for a sustained…

Read more »

Personal Finance

Share trading? Three shares with turnaround potential

Share trading has been difficult in 2022, but which companies have turnaround potential? Jo Groves takes a closer look at…

Read more »

Man using credit card and smartphone for purchasing goods online.
Personal Finance

Revealed! Why Gen Z may be the savviest generation when it comes to credit cards

New research reveals that Gen Z may be the most astute when it comes to credit cards. But why? And…

Read more »

Environmental technology concept.
Personal Finance

The 10 best-performing sectors for ISA investors

The best-performing sectors over the past year invested in real assets such as infrastructure, but is this trend set to…

Read more »

Road sign warning of a risk ahead
Personal Finance

Recession risk ‘on the rise’: is it time for investors to worry?

A major global bank has suggested the risk of a recession in the UK is 'on the rise'. So, should…

Read more »

pensive bearded business man sitting on chair looking out of the window
Personal Finance

1 in 4 cutting back on investments amid cost of living crisis

New research shows one in four investors have cut back on their investing contributions to cope with the rising cost…

Read more »

Image of person checking their shares portfolio on mobile phone and computer
Personal Finance

The 10 most popular stocks among UK investors so far this year

As the new tax year kicks off, here's a look at some of the most popular stocks among UK investors…

Read more »