Many Australians rely on credit to fund large purchases or grow a business. While personal and business loans both provide access to borrowed funds, they are each intended for specific purposes and carry their own risks and benefits.
Choosing the right product requires a clear understanding your funding needs, repayment capacity and overall objectives – which can ultimately save you money and protect your finances in the long-run.
Let’s compare business loans vs personal loans to help you determine which option most suits your needs.
Purpose and flexibility
A business loan is a type of financing specifically designed to cover commercial expenses, such as expansion, purchasing equipment, hiring staff, or managing cash flow.
Lenders typically restrict the funds to business‑related expenses, which means you can’t use a business loan to renovate your home or pay for a holiday.
By contrast, a personal loan is intended for private use, rather than for business purposes. Borrowers can generally use the funds for almost anything – from consolidating credit‑card debt, to buying a car, or funding your wedding.
Personal loans offer greater freedom, with few restrictions on how the funds can be spent. This flexibility makes them an attractive option for people who need fast access to cash.
Can you use a personal loan for business?
Certain lenders allow you to use a personal loan for business expenses, whereas others explicitly prohibit it.
Business loans, however, are limited to legitimate business use.
Loan amounts and repayment terms
While personal loans provide quick access to funds and can be used for a broad range of needs, they’re usually capped according to your income and credit history and provide smaller loan amounts over shorter terms. They also have higher interest rates than most business loans.
By contrast, business loans generally offer higher borrowing limits and longer repayment terms than personal loans, with the approved amount usually based on the business’s growth potential.
A business finance broker can help you compare options, secure competitive rates and identify the loan that best fits your needs.
Collateral and liability
Both personal and business loans can be secured or unsecured.
A secured loan is backed by collateral – such as equipment, property or a vehicle – while an unsecured loan relies solely on the borrower’s credit profile and typically carries a higher interest rate.
With personal loans, the debt is recorded on your personal credit file, leaving you personally liable for the repayments. This means any missed or late payments can directly impact your personal credit score and may put your personal assets at risk.
With most business loans, the debt is tied to the business itself rather than the individual owner. This means your personal assets remain separate and are protected should the business run into financial trouble.
It’s always wise to check the terms and speak with a broker or finance professional before securing your loan.
Credit building and borrowing capacity
Another difference between personal and business loans relates to borrowing capacity.
Repaying a personal loan on time builds your personal credit history, making it easier to qualify for a home loan or other personal credit products in the future.
Business loans, on the other hand, can strengthen your business’s credit score. A strong credit history can improve your capacity to secure larger loans or negotiate more favourable terms down the line.
Application and documentation requirements
One of the biggest differences between business loans and personal loans lies in the application process.
Personal loans are typically evaluated based on your income, expenses and credit score, and require minimal paperwork – making the application process quick and straightforward.
Business loans, on the other hand, usually involve a more detailed review, with lenders requesting a business plan, tax returns, financial statements and cash‑flow projections, to ensure your business can meet its obligations.
This additional documentation means the approval process for business loans is longer and more complex.
Business loan vs personal loan interest rates
A common question is: ‘Are business loans cheaper than personal loans?’ While it depends on the type and terms of the loan, there are general trends.
Business loan interest rates are often lower than personal loan rates, as established businesses are seen as lower-risk borrowers.
Personal loans (especially unsecured ones) tend to carry higher interest rates, as they rely entirely on your personal credit history and income.
Tax implications
Business loans can offer substantial tax benefits.
Interest payments on business loans are generally tax‑deductible because they’re considered a business expense. Even loans from private or non‑bank lenders remain deductible if the funds are used for income‑producing purposes.
This deduction lowers the effective cost of the loan and can help to improve cash flow.
By contrast, as personal loans are mostly used to fund personal expenses, they don’t offer any tax advantages. You can only claim a deduction if the loan is used for income‑generating purposes, such as investing in shares or funding a business expense. Even then, only the interest portion – not the principal repayments – is deductible.
Borrowers should always talk to a finance broker or accountant about their specific circumstances.
Pros and cons of business loans
Pros
- Higher loan amounts and longer terms: Lenders approve larger amounts and longer repayment periods for business loans.
- Potentially cheaper: Commercial loans often have lower interest rates than personal loans.
- Build business credit: Repayments help establish your business’s credit profile.
- Tax deductions: Interest on business loans is generally deductible.
- Protect personal assets: Business loans can be secured against your business assets rather than personal property.
Cons
- Complex application: Requires business plans, financial statements and projections.
- Restricted use: Funds must be used for business purposes.
- Eligibility: Start‑ups with limited trading history may find it harder to qualify.
Pros and cons of personal loans for business
Pros
- Fast approval and minimal paperwork: Personal loans are quicker to obtain and rely on personal credit.
- Flexibility: Fewer restrictions on how you use the money.
- Build personal credit: On‑time repayments strengthen your personal credit record.
Cons
- Higher interest rates: Personal loan rates are generally higher, especially if unsecured.
- Lower loan amounts and shorter terms: Personal loans typically don’t provide the large sums or longer repayment periods available with business loans.
- Limited tax deduction: Interest is only deductible if the loan funds are used for income‑generating purposes.
Should you choose a business loan or personal loan?
Deciding between a business loan vs a personal loan depends on your situation.
If your business is established, generates steady revenue and requires a substantial sum for expansion or equipment, a business loan can offer higher loan amounts with longer terms.
For all personal expenses, or if you’re just starting out in business and need a small amount quickly, a personal loan may be the more practical option.
Regardless of which option you choose, always compare loan interest rates and terms, and seek guidance from a finance professional.
