Whether you’re starting a new business or moving across the country, sometimes you need a leg up in order to take care of everything financially. Business loans can help you get your business off the ground or out of a rough patch. Personal loans can help you get your personal finances in order so you can better handle your business. But which is right for you?
It depends on the situation, but it’s always important to keep your business and personal finances distinct, especially as a sole proprietor. This blog will help you determine when you need a personal loan and when you need a business loan.
Business Loans vs. Personal Loans
Business loans are loans that are designed to help fund your business. Maybe you need to scale your business to include new departments or buy new equipment. A business loan can help with this. Sole proprietors can apply for small business loans, especially from the Small Business Administration (SBA). They often require a heavy amount of paperwork but can be short or long-term loans. You can find secured or unsecured business loans, in which secured loans require collateral.
Personal loans are loans that you apply for and pay back with your personal finances and credit. However, you can make a personal loan for business purposes. This is simpler than applying for a business loan, and typically an unsecured loan. It tends to have a smaller range than most business loans, but comes with less paperwork. If you are unable to pay back the loan, however, you will be personally liable.
Which Loan Is Better For Sole Proprietors?
As a sole proprietor, you are an individual, but you are also your business. It can be difficult to decide which is the best choice for you: a business loan or a personal loan. The Small Business Administration has several loans for sole proprietors, including the 7(a) loan. Loan terms can last between 5 and 25 years. You can apply through the SBA and find the right terms for you. These loans will be contingent on your business, and it will be the liability of your business to pay them off. They may also make taxes easier, as it allows you to separate your personal finances from your business finances.
On the other hand, if your personal credit is high enough, you might be able to apply for a personal loan to fund your business. This will take less paperwork, won’t require collateral, and may be less of a hassle overall upfront. It may make taxes more complex, as this is a personal loan that you are taking out for your business. It may also mean that you have to have higher credit than you might for a business loan. Finally, you shouldn’t take a personal loan unless you’re confident that you can handle any personal liability.
Not sure where to start? Bottom Line Consulting offers management consulting and assistance with the financial setup for business startups. Contact us today to learn more about your options and how we can help you.