What Is A Business Loan & How Is It Different Than A Personal Loan?

Posted by Martin Collins on Jun 19, 2019 8:00:00 PM
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What Is A Business Loan And How Is It Different Than A Personal Loan

The basic difference between a business loan and a personal loan is simple: A personal loan is provided to an individual for non-business related purposes, whereas a business loan is taken out by business entity for reasons relating to growth or operations. The business in question could be a partnership, limited company or a self-employed sole trader.

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A self-employed plumber, for instance, may take out a personal loan to fund his daughter’s wedding, and a business loan to pay for training and upgraded tools. There are many similarities between the two types of loan, but the interest, application criteria and repayment terms may be different for business and personal loans, even when the two are provided by the same lender. Are there any other differences?

Personal Loans

What most people refer to as a personal loan is an unsecured bank loan, provided by a high street bank. Lenders don’t usually pry too deeply into what the loan is required for, so long as the borrower has sufficient income to cover their repayments, and an acceptable level of risk as expressed by their credit score.

Personal loans are generally for relatively small amounts (less than £10,000), and are paid back over three, five or seven year terms. There are differences in the personal loans offered by various providers, but the market is broadly similar.

Private mortgages are also personal loans, but these fall into a different category. Here the lending is for a larger amount, paid back over a longer term, and is secured against collateral – usually the property itself. Some private car loans operate on this principle as well.

Business Loans

The main differences with business loans are in the flexibility of repayment terms, the amounts available, application criteria and the cost of borrowing. In short, the world of business lending is far more diverse than that of personal lending.

Secured Or Unsecured?

Unsecured loans are available to businesses with a sufficient credit score, but these are not the most common type of loan. As businesses tend to borrow larger sums of money than individuals, lenders often require security, either in the form of company-owned assets or property, or personal guarantees from company directors. A personal guarantee makes the director(s) personally liable for repaying the loan if the business is unable to do so.

Applying For A Business Loan

High value business loans of up to £250,000 are readily available with the right credentials, but businesses need to prove they are a good lending proposition. A business lender will want to know exactly how you plan on spending their money. This makes the application process more involved than when applying for a personal loan – which may simply be a matter of filling in an online form. Most business lenders will expect to see two to three years of submitted accounts, a consistent monthly turnover and an accurate sales forecast. Start-ups, businesses with an erratic turnover and those who are dependent on one or two large clients, rather than having a diverse customer base, may find it difficult to get business funding because of the perceived level of risk they present.

Specialist Business Lenders

Fortunately, with business loans, the inherently cautious high street banks are not the only option. There are hundreds, if not thousands of independent lenders operating in the UK, many of them specialising in specific sectors such as agriculture, construction or healthcare. These lenders are a diverse group, incorporating trade unions, large businesses, independent banks, regional building societies, venture capital firms, trust funds, cooperatives, P2P lending platforms and wealthy individual investors.

Every lender will have their own criteria for lending, will offer different amounts and different repayment terms, but by going to a specialist lender a business has a greater chance of acceptance for a specific funding need. A business refused funding by a high street business bank because their sector is considered high-risk may find a ready source of funding from lenders who understand the intricacies of that sector.

Making The Best Borrowing Decision

Business loans are a popular source of funding and one of the easiest ways of facilitating growth. However, care should be taken in choosing the right product for your business, based on your cash flow and growth projections. At Business Finance Solutions Ltd we can help guide you to the right product, selecting from competitively priced loans from hundreds of reputable specialist and mainstream lenders. To find out more, please call 0345 5050 888 or click here to download our free Business Loans Guide.

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