When it comes to securing funding for your new business, loans are one of the most common ways of getting access to an immediate cash injection. However, sometimes it can be difficult to find the right loan for your needs. Understanding both your financial requirements and the options available to you is important when deciding what kind of loan best matches your needs.
In this article, we’ll explain some of the key differences between personal and business loans, as well as breaking down some of the different funding options available if you’re looking to take out a business loan.
What is a personal loan?
Personal loans are exactly what they sound like: a sum of money that you as an individual can use to fund all manner of personal ventures. Whether you’re planning a wedding, adding an extension to your house, or have an unexpected bill, personal loans can offer a source of financial support. They’re multipurpose, so there is little to no regulation on what you can use the money for.
It is worth noting that some lenders may specify that these loans cannot be used for business purposes, but there are some that allow you to use them for your startup.
As they are so unspecific, you tend to need less documentation in order to secure funding: usually proof of address and proof of identity, alongside some eligibility checks like credit score and monthly income.
What is a business loan?
Business loans are designed to support a business’s cash flow; whether to help a new start-up get up and running, or allow an established business to invest in new technology or expand the team. As with personal loans, there will be certain stipulations regarding affordability and credit checks, but there can also be additional terms and requirements that might be difficult for smaller businesses to meet.
Despite this, there are a number of benefits to choosing a business loan to fund your ventures.
- Business loans tend to allow you to borrow a much larger amount, which means that if you’re starting out, you can get access to a more significant sum to get you started.
- As they’re designed for business rather than personal use, there are different kinds of financing options that aren’t available if you’re taking the loan out as an individual. This means you can better tailor them to suit your needs.
- As you’re taking the loan out as the business itself, the business can begin to build its own credit history. You can then use this as a stepping stone to additional funding in the future.
Personal Loans vs Business Loans: What’s the difference?
Perhaps the biggest difference between personal and business loans is that business loans come in much larger balances. Personal loans are typically lent as unsecured loans, which means they aren’t tied to an asset; you simply agree to the repayment terms set by the bank. Business loans, on the other hand, tend to be for much higher sums. While you can get an unsecured business loan, there are many different kinds of funding options that you can explore that would allow you to borrow much larger amounts of money.
The other main reason why personal loans tend to be for smaller amounts is because lenders require less documentation and have fewer eligibility checks in order to process a personal loan. To take out a business loan, you might have to present things like a business plan and a cashflow forecast as part of the application process, as well as the standard credit and affordability checks. Personal loans, on the other hand, do not require as much documentation; simply present proof of identity and address, pass any required eligibility checks, and your loan will be processed fairly quickly.
Additionally, business loans tend to come with some extra support as part of the service. When it comes to personal loans, the lender isn’t usually too interested in what you do with the money as long as you keep up with your repayments. For business loans, however, the lender will likely offer some kind of professional support, which can be incredibly useful for small businesses and startups.
Should I take out a personal or business loan?
There are benefits and drawbacks to taking out either kind of loan within a business context. As you’re weighing up your options, the most important thing to consider is whether you’ll be able to meet the criteria for approval. This is important to mention within the context of a small business or startup in particular, as there may be cases where you are unable to provide all of the documentation required.
Some loans require a business to have been trading for at least 2 years, or have proof of a positive trading history. The business might not have a credit history, and so it’s difficult to pass the credit check. Having an awareness of what information a lender might ask from you and what you’re able to provide will help you to better understand your options.
Business funding options
In most cases, a business loan will make the most sense if you’re looking for additional funding to support your business or startup. However, there are many different types of funding that you can explore. Finding the right financing for your needs can make all the difference. In this section, we’ll discuss some of the most common funding options available to businesses, as well as some of their benefits.
Growth Guarantee Scheme
The Growth Guarantee Scheme (GGS) has been through a number of iterations over the years, most notably as a Coronavirus recovery scheme throughout the pandemic. This loan is designed to help small and medium sized businesses grow and invest, and can specifically be used for “any genuine business need”. Under this scheme, the government will guarantee 70% of the finance to the lender. It’s important to note that the GGS is currently open until 2026, subject to governmental review.
Unsecured Business Loan
Unsecured business loans are another brilliant option for small to midsize businesses to access capital to help them grow. Unlike secured business loans, which we’ll discuss in a moment, you don’t need to secure the loan against any assets or property. This means that they’re a great option for small businesses, as they’re easier to secure, more accessible, and fast to arrange.
Secured Business Loan
Secured business loans, on the other hand, use a business’s or its owner’s property as collateral against the loan. Because of this, you can usually expect to borrow more money if you take out a secured business loan. The amount you’ll be able to borrow will depend on the value of those assets you secure the loan against, but this does mean that younger businesses, or businesses without sufficient assets won’t be able to pursue them.
Asset Finance
Similarly to secured business loans, asset finance refers to loans that are granted based on the value of a business’s assets. Under this kind of loan, assets like machinery, IT software and even medical equipment are used as security in order to secure finance to fund projects or cover a surge in growth. These types of loans don’t have an impact on a business’s cashflow, and can allow a company to release capital from already owned materials or equipment.
Merchant Cash Advance
For seasonal businesses who operate with a card machine, the Merchant Cash Advance presents an excellent option. Sometimes known as a PDQ Cash Advance or a Business Cash Advance, your business would receive an advance of cash that would be paid back through a pre-agreed percentage of future credit card and debit card transactions until the loan is paid off. These kinds of loans are often used for things like growth, refurbishments, new staff or marketing.
Invoice Finance
As invoices can take up to 90 days to complete, you might find yourself waiting for money that you’re owed. Invoice finance products allow you to maintain business as usual while you wait for the invoice payments to come through. Best suited to B2B businesses, invoice finance products help to avoid any negative impacts of delayed or waiting payments.
Bridging Loans
Bridging loans are so named because they bridge the gap between an immediate need and your available credit. If you have an essential business purchase that needs to be completed quickly, a bridging loan would be the solution. They’re typically used when acquiring property, and are considered high-value, short-term solutions. You typically have to have a clear and structured plan for paying off these types of loans before you will be approved.
Revolving Credit Facility
Revolving credit facilities work in a similar way to an overdraft: you agree a maximum amount with a lender that you can access as and when you need to. So long as you continue to pay off your balance, you can continue to access these funds whenever you need to. Most terms last up to 2 years, but provided you’ve continued to keep up with repayments, you’re likely to be renewed.
Check your eligibility for a business loan with Aurora Capital
If you’re looking for funding for your business, explore your options with Aurora Capital today. Get in touch today for advice on the most suitable finance products for you.
