Business versus personal loan – which is best for your business?

A loan may be a viable option in helping to get your start-up off the ground and on the path to success.

Over £57.7 billion was lent to Smaller businesses by UK banks in 2021, and the Government’s Start Up Loans scheme has delivered over 100,000 loans, providing over £1 billion of funding since 2012 to entrepreneurs across the UK.

Starting a business typically requires finance, whether from your own money, help from friends and family, or investors.

Applying for a loan is an alternative route to funding your business idea.

There are a variety of loans you apply for, all with different criteria that your business may need to meet.

Business and personal loans may have certain restrictions, so it may help if you understand the difference between the types of loans and the most suited for your circumstances.

You can use two broad types of loans to fund your start-up – an unsecured personal loan and a business loan.

Understanding the difference between the two types is essential to help you understand what type of loan best suits you.

You should always seek professional independent financial advice to help identify the best form of funding for your business.

Unsecured personal loan

An unsecured personal loan can be used on almost anything you want.

They can be helpful if you need to borrow money to buy a car, fund a wedding, renovate your home or consolidate debts, for example.

Personal loans are typically unsecured, meaning you don’t need to provide collateral to receive one.

Personal loans may be used for business purposes, but not all lenders permit this, so check in advance.

Applying for a personal loan can be quicker and easier than seeking a business loan when funding your new business.

They may take a few days to a week to process, and the state of your start-up doesn’t matter.

Some other benefits of taking out a personal loan for your start-up include:

• Since the bank relies on your personal credit score when assessing your application and not your business, a personal loan may be ideal if your start-up hasn’t been trading for long.
• not being secured against personal assets, such as your home.
• Having lower Interest charges than credit cards if borrowing a larger amount.

Yet there are some disadvantages to personal loans you should consider such as:

• the size of a loan is typically smaller than a business loan. If your start-up requires a larger cash injection, other funding options may be worth exploring.
• You being personally liable for the loan. Your credit rating may be impacted if the business cannot repay the loan.
• The loan may have to be paid back sooner than a business loan.

Business loan

Business loans provide funds that can help start or grow your business.

For example, you may use a business loan to cover the cost of renting premises, employing staff, and purchasing equipment.

You can typically borrow anything from as little as £1,000 up to £100,000 or more.

You may have to agree on the collateral to be used when securing your loan.

Collateral can include premises or land owned by the business, assets such as machinery and equipment, vehicles, or sometimes personal assets of the business owner.

This security ensures the loan can be repaid if your business defaults on loan repayments.

Transparency of your business credit history and score will need to be provided, as well as details of other outstanding loans.

There are several potential advantages to taking out a business loan:

• you could borrow a larger amount than with a personal loan
• your business can start building its credit score - making it easier to receive funding later
• different financing options may help you, such as secured or unsecured loans and peer-to-peer business loans
• some business loans may offer business support and tools.

Disadvantages to business loans may include:

• a potentially lengthy application process
• strict eligibility criteria, and businesses with other existing loans may not be accepted
• the risk of losing business assets if the secured loans is not repaid.

Read our guide to secured vs unsecured business loans.

Start Up Loans

An alternative form of funding is a Start Up Loan.

This is a government-backed personal loan available to individuals looking to start their own business or grow an existing one.

Successful applicants can also receive 12 months of free mentoring and business support to help push their successes even further.

As it’s an unsecured personal loan, there’s no need to put forward any guarantors or assets.

It also allows all owners or partners of the same business to apply individually for up to £25,000 each (a maximum of £100,000 available per business).

If your application is approved, you can borrow between £500 and £25,000 with a fixed interest rate of 6% per annum repaid over 1-5 years.

The application process is straightforward.

It involves an eligibility check, and you will need to register to start.

You then need to supply information on the business, such as how much you want to borrow and for what purpose.

A personal credit check is then conducted, and if passed, you will need to submit a Business Plan, Cash Flow Forecast, and Personal Survival Budget – there are free templates to help you with this part of the application.

A Delivery Partner will be assigned to you and will work with you to submit your application and documents.

If your application is successful, you can begin your 12 months of free mentoring once your loan is drawn down.

To apply for the loan, you have to fit the following criteria:

• be aged 18 years of age or over
• be a UK resident
• be starting a new business or trading for up to 36 months
• have the right to work in the UK
• have a business based in the UK.

Check our ‘Am I Eligible?’ page for further criteria and information.