Business Loan vs. Personal Loan: Which One Should You Use?

Business loans and personal loans can both put money in your hands, but they're designed for different purposes and come with different implications. 

Business loans are issued to your company, often require business documentation, and may help build business credit. 

Personal loans are issued to you as an individual, based on your personal credit and income. 

You can technically use a personal loan for business expenses, but it's not always the smartest move. 

The right choice depends on your business's age, your credit profile, how much you need, and what you're using the money for.

The Core Differences

Before diving into which is better for your situation, let's clarify what separates these two products.

Business loans are designed for commercial purposes. Lenders evaluate your business's revenue, time in operation, and financial health alongside your personal credit. The loan may appear on your business credit report. Documentation typically includes bank statements, tax returns, and business formation paperwork.

Personal loans are based on you as an individual. Lenders look at your personal credit score, income, and debt-to-income ratio. The business itself isn't part of the equation. The loan appears on your personal credit report regardless of how you use the funds.

A 2023 Federal Reserve survey found that 18% of small business owners used personal loans or personal credit cards to finance their business operations. It's common, especially for newer businesses. But common doesn't always mean optimal.

Here's a side-by-side comparison:

When a Business Loan Makes More Sense

For most established businesses, business loans are the better choice. Here's why.

Higher Borrowing Limits

Personal loans typically cap out around $50,000 to $100,000. Business loans can go much higher. Small business loans range from a few thousand dollars to several million depending on your qualifications.

If you need $150,000 for equipment or $500,000 for expansion, personal loans simply won't get you there. You need business financing.

Building Business Credit

Every business loan you repay successfully can strengthen your business credit profile. Over time, this creates options. Better rates, higher limits, and eventually the ability to borrow based on your business's strength rather than your personal credit.

Personal loans don't help here. They build your personal credit, which matters, but they do nothing for your business's creditworthiness as a separate entity.

If you're thinking long-term, establishing business credit now pays dividends later. Our guide on getting a business loan for your LLC covers how business credit building works.

Separating Business and Personal Finances

Mixing personal and business finances creates headaches. Tax time becomes complicated. Liability protection gets murky. Tracking expenses turns into a nightmare.

Business loans keep things clean. The money goes into your business account, gets used for business purposes, and the payments come from business revenue. Your accountant will thank you.

Potentially Better Terms for Larger Amounts

For loans over $50,000, business financing often offers better terms than personal loans. Business lenders are equipped to handle larger amounts and longer terms. A long-term business loan might stretch over five to ten years with reasonable rates. Personal loans rarely extend beyond seven years.

Tax Advantages

Interest on business loans used for business purposes is generally tax-deductible as a business expense. This effectively reduces the cost of borrowing.

Interest on personal loans is only deductible if you can prove the funds were used for business. That requires careful documentation and can get complicated. With a business loan, the deduction is straightforward.

When a Personal Loan Might Work Better

Personal loans aren't always the wrong choice. In certain situations, they actually make more sense.

Brand New Businesses

If your business is less than six months old, most business lenders won't touch you. They want to see track record, and you don't have one yet.

Personal loans don't care how long your business has existed. They're based on your personal financial profile. If you have good personal credit and steady income from other sources, you might qualify for a personal loan even when business loans are out of reach.

Smaller Loan Amounts

Need $5,000 to $15,000? Personal loans can be simpler and faster for smaller amounts. The application process is often more streamlined, and approval can happen quickly.

For very small funding needs, the convenience of a personal loan might outweigh the benefits of business financing.

Stronger Personal Credit Than Business Financials

Maybe your personal credit score is 780, but your business is struggling or inconsistent. Personal loan approval depends on your personal profile. If that's stronger than your business's current state, you might get better terms on a personal loan.

This is especially relevant for side businesses or ventures that haven't yet generated significant revenue.

Simpler Application Process

Personal loan applications are typically shorter and require less documentation. No business tax returns, no profit and loss statements, no formation documents. Just personal income verification and credit check.

If you're in a hurry and the amount is modest, the streamlined process might matter.

Privacy Considerations

Business loans sometimes require more disclosure about your operations, partnerships, and financials. Personal loans keep things between you and the lender.

For some borrowers, especially those with complex business situations or privacy concerns, this simplicity has value.

The Hybrid Approach: Personal Loans for Business Use

Can you take out a personal loan and use it for your business? Legally, yes. Most personal loans don't restrict how you spend the funds.

But there are considerations.

Lender policies vary. Some personal loan agreements prohibit business use. Read the fine print. Using funds in violation of your loan agreement could technically trigger default provisions, though enforcement is rare.

You're personally liable either way. With a personal loan, there's no separation between you and the debt. If the business fails, you still owe the money. Business loans often include personal guarantees too, but some business financing options offer more protection than personal loans ever would.

Tax documentation gets tricky. To deduct interest on a personal loan used for business, you need clear records showing exactly how the funds were used. Commingling personal and business expenses from the same loan makes this harder.

You won't build business credit. The loan appears on your personal credit report only. Your business gains nothing in terms of credit history.

If you do use a personal loan for business purposes, keep meticulous records. Deposit the funds into your business account. Document every expenditure. Make it easy to prove the business use if questions arise.

Interest Rate Comparison

Rates vary based on your qualifications, but here are typical ranges.

Personal loans: 8% to 36% APR for most borrowers. Those with excellent credit (750+) might see rates below 10%. Those with fair credit (650-699) typically pay 15% to 25%.

Business loans from banks: 7% to 13% for well-qualified borrowers. These require strong credit, established businesses, and often collateral.

SBA loans: 10% to 13% currently, with rates capped by government guidelines. Excellent terms but lengthy approval process.

Online business loans: 15% to 50% APR depending on your profile. Faster and more accessible than banks, but pricier.

Business lines of credit: 10% to 35% depending on the lender and your qualifications. Lines of credit offer flexibility that term loans don't.

Merchant cash advances: Not technically interest, but factor rates translate to effective APRs of 40% to 150%. Expensive, but fast and accessible.

For a detailed breakdown, our guide to business loan interest rates covers what to expect in 2026.

The comparison isn't straightforward. A borrower with excellent personal credit might get a better rate on a personal loan than they'd get from an online business lender. But that same borrower might qualify for even better rates from a bank or SBA lender if their business is established.

Credit Score Requirements

Personal loans: Most lenders want scores of 660 or higher for competitive rates. Some work with scores as low as 580, but expect rates above 25%.

Business loans from banks: Typically require personal credit scores of 680+, often 700+ for the best terms.

Online business loans: More flexible. Many work with scores in the 600s. Some serve borrowers with bad credit scores in the 500s, though rates reflect the added risk.

SBA loans: Generally want 680+ personal credit scores, though some lenders work with slightly lower.

If your personal credit is strong but your business is new or has limited financials, personal loans might be easier to access. 

Loan Amounts and Terms

Personal loans:

1. Typical range: $1,000 to $50,000
2. Maximum from some lenders: $100,000
3. Terms: 1 to 7 years

Business loans:

1. Short-term loans: $5,000 to $500,000, terms of 3 to 18 months
2. Long-term loans: $25,000 to $5 million+, terms of 1 to 25 years
3. Lines of credit: $5,000 to $5 million
4. SBA loans: Up to $5 million, terms up to 25 years

If you need more than $100,000, business financing is your only realistic option. If you need less than $25,000 and speed matters more than building business credit, personal loans compete effectively.

Application Requirements

Personal loans typically require:

1. Personal identification
2. Proof of income (pay stubs, tax returns)
3. Bank statements
4. Credit check

Business loans typically require:

1. Personal identification for owners
2. Business formation documents
3. Business bank statements (3-6 months)
4. Business tax returns (1-2 years)
5. Personal tax returns
6. Credit check (personal and sometimes business)
7. Profit and loss statement
8. Business plan (sometimes, especially for banks and SBA)

The documentation burden for business loans is heavier. If you're organized and have your records in order, it's manageable. If your bookkeeping is a mess, gathering business loan documentation can be painful.

Impact on Credit Reports

Personal loans appear on your personal credit report. Payment history affects your personal credit score. The debt counts toward your personal debt-to-income ratio.

Business loans may appear on your personal credit report, your business credit report, or both, depending on the lender and whether you provided a personal guarantee. Payment history can affect both scores.

Building business credit matters for the future. A business with its own strong credit profile can eventually borrow based on the company's strength rather than relying entirely on the owner's personal credit. That separation creates options and protects your personal credit capacity for personal needs.

Tax Implications

Interest on loans used for business purposes is generally deductible as a business expense.

With a business loan, this is straightforward. The loan is for business use by definition. Document your expenses normally, deduct the interest, done.

With a personal loan used for business, you need to prove the business use. That means:

1. Clear documentation of how funds were spent
2. Ideally, depositing loan proceeds directly into a business account
3. Tracking interest payments allocated to business use

If you use a $30,000 personal loan with $10,000 for business and $20,000 for personal expenses, only the interest attributable to the $10,000 business portion is deductible. This requires careful record-keeping.

When in doubt, consult a tax professional. The rules around interest deductibility have nuances that depend on your specific situation.

Making the Decision

Ask yourself these questions:

How much do you need?

1. Under $25,000: Either option works
2. $25,000 to $100,000: Business loans usually better, personal loans possible
3. Over $100,000: Business loans are your only realistic option

How established is your business?

1. Under 6 months: Personal loans may be your only option
2. 6 months to 2 years: Online business loans accessible, banks probably not
3. Over 2 years: Full range of business loan options available

What's your credit situation?

1. Strong personal, weak business: Personal loans might offer better terms
2. Strong business, weak personal: Business loans emphasizing revenue might work better
3. Strong both: Business loans give you more options and higher limits

How important is building business credit?

1. Very: Use business loans even if personal loans offer similar terms
2. Not a priority: Choose whichever offers better terms

How quickly do you need funds?

1. Same day to one week: Online business loans or personal loans are comparable
2. Can wait 2+ weeks: More business loan options open up

For most established businesses, business loans are the better path. They offer higher limits, build business credit, keep finances separate, and provide clearer tax treatment. Personal loans make sense primarily for very new businesses, very small amounts, or situations where personal credit significantly outperforms business financials.

Frequently Asked Questions

Can I use a personal loan to start a business?

Yes, and many entrepreneurs do exactly this. Personal loans don't restrict how you use the funds. For brand new businesses that can't yet qualify for business financing, personal loans are often the only option besides personal savings or credit cards.

Will a business loan affect my personal credit?

It can. If you provide a personal guarantee, which most small business loans require, the lender may report to personal credit bureaus. Late payments or default will hurt your personal score. Even without a personal guarantee, some lenders pull your personal credit during the application, creating a hard inquiry.

Which has lower interest rates?

It depends on your profile. Personal loans for borrowers with excellent credit (750+) typically range from 8% to 12%. Bank business loans and SBA loans can be as low as 7% to 10% for qualified businesses. Online business loans tend to be higher, often 20% to 40%. There's no universal answer.

Can I have both a personal loan and a business loan at the same time?

Yes. They're separate products evaluated independently. Having one doesn't prevent you from getting the other, though both will factor into your overall debt load when lenders assess your ability to repay.

Which is easier to get approved for?

For new businesses or those with limited revenue, personal loans are often easier. For established businesses with strong financials, business loans may actually be easier since lenders can evaluate the business's ability to repay rather than relying solely on personal income.

Do personal loans for business use build business credit?

No. Personal loans appear only on your personal credit report. To build business credit, you need to use credit products that report to business credit bureaus, including business loans, business credit cards, and trade accounts with suppliers.