Business Loans vs. Personal Loans: What are the Key Differences?

Key Takeaways

• Personal loans offer quick access to funds and flexible usage, making them appealing for new or early-stage business owners.
• Business loans provide higher funding amounts, help build business credit and may come with tax-deductible interest.
• Approval for business loans in Canada often requires credit history, cash flow, and a business plan, whereas personal loans are more reliant on individual credit.
• Small businesses may start with personal loans but should transition to business-specific financing as they grow.
• Choosing between the two depends on the amount needed, credit situation, and intended use of funds.
• Alternatives like lines of credit or merchant cash advances can supplement traditional loan options.

Securing a business loan is no small or easy feat, especially when you’re stuck choosing between business loans and personal loans. But if you can nail down the differences between the two, you can confidently select the right financing option for your firm’s unique needs. Keep reading as we break down what sets these two options apart.

If you’re wondering about any of the following questions, this article will be helpful:

• What is a personal loan?
• Can I use a personal loan for business expenses?
• Can I use a personal loan to start a business?
• What’s the difference between a personal loan and a business loan?

Understanding Personal Loans

Personal loans are defined as longer-term loans with quick funding and considerable flexibility. Businesses may take out personal loans when they’re having trouble qualifying for traditional business loan types. These loans are also ideal for consolidating several high-interest debts into a single loan and payment. However, these loans can be used for virtually anything.

To be approved for a personal loan in Canada, companies and individuals would have to choose a bank, credit union, or another lender. The lender will request income information, a permanent address, and bank account information. They’ll also run the applicant’s credit score and look at their credit report to determine whether they qualify.

Personal loan interest rates typically come with a fixed interest rate (though they can be fixed or variable). And repayment terms are usually planned out in advance.

Understanding Business Loans

Business loans are a lump sum of money a borrower receives from an agency or organization. These loans are to be used for well-defined business purposes. The borrower will pay the lender back according to predetermined terms (along with applicable fees and interest). Businesses of all sizes and maturity levels have leveraged this loan type to fund initial startup costs, real estate purchases, purchase orders, and more.

There are a wide variety of business loan types, including:

• Small business loans
• Equipment purchase loans
• Working capital loans
• Startup loans
• And more

Each of the above loans is intended for a different borrower type or use case.

Business loan eligibility in Canada varies by lender, but you’ll typically need:

• A relatively good credit score (around 600)
• A business plan
• Current cash flow and expected future cash inflow
• Collateral (with certain loan types)
• Financial statements that confirm your expenses, revenue, and other metrics

To apply for a business loan, start by selecting a lender and following their application process. You’ll typically complete an application online or in person, then provide any required business documents — such as a business plan, financial statements, or tax records — so the lender can properly assess your risk. If you’re approved, you’ll receive a loan agreement to review and sign before the funds are disbursed. With business loans, you’ll usually need to specify how you plan to use the funds.

Personal loan interest rates in Canada vary based on the type of business loan you select – so do repayment terms.

Key Differences Between Personal and Business Loans

Personal and business loans are alike in some ways, but they hold some very important differences for borrowers. The chart below outlines them.

Pros and Cons: Business Loan vs. Personal Loan

Before deciding which type of loan would be best for you, be sure to weigh both the advantages and disadvantages.

Personal Loans

• Pros:
  • Typically easier to obtain than business loans.
  • Allow for quicker approval than business-focused financial solutions.
  • You can take out a personal loan for business use.
• Cons:
  • Loan amounts are on the lower end (often under $50,000).
  • Your personal loan can directly impact your personal credit score.

Business Loans

• Pros:
  • Give you access to higher loan amounts than you could get with personal loans.
  • Help you build your business credit rather than potentially affecting your personal credit.
  • Potential tax deductions for accrued interest.
  • Considered one of the best small business financing options for growing companies.

• Cons:
  • Business credit score importance. Arbitrary credit score minimums and cash flow history evaluation.
  • Longer approval times are necessary for lenders to adequately assess a business’s ability to repay a given loan.

Personal Loan vs. Business Loan: When to Choose Which Loan

Consider a personal loan if any of the following apply to you:

• You’re new to business ownership and don’t yet have established business credit.
• You need quick access to funds for a short-term expense under $50,000.
• You want to be able to use the borrowed funds for more than just business expenses.

A business loan might be a better fit if:

• Your business has been operating for several years with consistent revenue.
• You need to finance a very large investment, initiative, or long-term project.
• You want to build your business credit or would rather not use your personal credit.

Alternatives to Traditional Loans

As it turns out, traditional loans aren’t the only option to consider when evaluating funding options. Here’s an overview of a few alternatives:

• Lines of credit — Where you’ll borrow money up to a pre-set limit and pay interest only on the amount you take out. With a line of credit for a small business, funds can be used however you prefer.
• Merchant cash advances — Borrowers receive cash upfront with the promise of paying a portion of their future credit sales in return.
• Equipment financing — You can get cash to buy equipment and pay the money back over time. The equipment may or may not be used as collateral.

Conclusion

So, there you have it — the differences between a personal loan and business loan. All in all, these loans have some important differences, specifically in their purposes, collateral requirements, credit impact, and tax implications. So, before choosing a business loan or personal loan, be sure to evaluate your company’s unique needs first. If you’re looking for small business or startup funding in Canada, we encourage you to explore financing options tailored to your business goals with Greenbox Capital.

Frequently Asked Questions

1. What is the difference between a personal loan and a business loan?

A personal loan is tied to your individual credit and can be used for nearly any purpose, while a business loan is granted to a business and must be used strictly for business-related expenses.

2. Can I use a personal loan for my business?

Yes, in some cases, you can use a personal loan to fund your business, but be aware that it may affect your personal credit and offer lower borrowing limits than business loans.

3. Is a personal loan easier to get than a business loan?

Typically, yes — personal loans often have fewer requirements and faster approvals, especially for newer entrepreneurs or those without established business credit.

4. What is the difference between a commercial loan and a personal loan?

A commercial loan is a type of business loan designed for larger, more complex financial needs (like real estate or large capital investments), whereas a personal loan is usually for smaller, flexible funding tied to your personal credit.

5. Can I build business credit with a personal loan?

No, personal loans impact your personal credit history. To build business credit, you’ll need financing in your business’s name, such as a business loan or business line of credit.

6. What are some alternatives to traditional loans for businesses?

Options include a line of credit for small business, merchant cash advances, or equipment financing — each offering flexible ways to access working capital.