Business loans vs Personal Loans: Know When to Use Each and Avoid costly mistake

We’ve all faced that crucial moment when additional funding becomes necessary for our business growth or personal needs. The decision between business loans and a personal loans isn’t always as straightforward as it might seem.

The majority of Sydney business owners struggle to choose between a personal loan and a business loan, wondering which one would suit their circumstances. As a business owner myself, I am aware that comparing business loan vs personal loan options requires careful consideration of multiple variables.

Knowing Sydney’s Business and Personal Loan Environment

With the lending environment in Sydney at the moment, we are seeing radical changes in the provision of business and personal loans. The lending environment is getting tougher by the day, with non-bank lenders experiencing increased funding costs as well as stiff competition from banks to source prime-quality borrowers.

Looking at the interest rates, this is what we are seeing within the market:

Business loans: Small business 7.41%, medium business 6.26%, large business 5.82%

Personal loans: Fixed rates 8.00% to 20.00% p.a., comparison rates 9.04% to 20.89% p.a.

We have seen that growth in housing credit provided by non-banks has slowed in 2023 as interest rates increased. This impacted both business and personal lending markets, with some lenders relaxing serviceability to maintain lending volumes.

What’s interesting is that many non-bank lenders are now targeting higher-risk pools of borrowers, specifically those for whom less evidence exists of their finances. This has created new opportunities for those borrowers who wouldn’t be able to qualify under traditional banking criteria, although it generally costs them more.

Determining Your Financial Situation

Before we dive into loan applications, we need to test our finances very carefully. Let’s start with our credit score, as it is a vital factor in considering whether or not to qualify for a loan. For business loans, you’ll typically need a 690 or higher credit score to qualify for traditional bank or SBA loans. That said, some internet lenders will take on scores as low as 500.

In terms of revenue requirements, we have found that most lenders require a certain minimum annual or monthly revenue. Most lenders require around $30,000 a year in revenue, although others may approve loans with as little as $10,000 in monthly revenue.

The following are the most critical financial measurements that we need to examine:

• Debt Service Coverage Ratio (DSCR): All large lenders expect a figure over 1.25, reflecting sufficient cash flow to service debt.
• Revenue Stream: Conventional financing options review both balance sheet revenue and profitability on tax returns
• Collateral Requirements: Business loans generally necessitate collateral, including equipment, real property, or inventory

For documentation, we’ll need to prepare our financial statements, including profit and loss statements, balance sheets, and cash flow statements. It’s worth noting that personal loans often have simpler requirements, focusing primarily on personal credit scores and income verification.

In comparing Sydney business loans and personal loans, we need to consider that business loans have more favorable terms but require fuller documentation. Personal loans, while possibly easier to obtain, may have higher interest rates but lower collateral requirements.

Making the Strategic Decision

When choosing between business loans and personal loans, we need to consider some matters of fact. Let’s examine the most significant differences that will lead us to our choice.

In terms of funding amounts, business loans have more favorable limits – up to $5 million for SBA loans, for example, against the $100,000 limit of personal loans. Thus, business loans would be suitable for larger investments or growth.

Here’s what we need to consider when making a decision:

• Speed of Funding: Personal loans are typically faster to sanction, typically between 1-2 days, while business loans take weeks to approve.
• Documentation Required: Business loans call for sophisticated business strategies and financial projections, while personal loans focus on personal credit report.
• Flexibility of Use: Personal loans provide greater flexibility in fund use, whereas business loans are only to be used for business purposes.
• For new businesses in Sydney, we’ve found that modern financing solutions like Cash Flow Lending and Lines of Credit have become increasingly popular. Prospa, for instance, offers loans up to $150,000 with terms from 3-36 months, while On Deck provides flexible options ranging from $10,000 to $250,000.

It depends to a great extent on our situation. If we need money urgently and have a good individual credit rating, maybe a personal loan is the best option. However, if we need larger amounts and have a good business with good accounts, a business loan would usually provide us with improved terms and tax advantages.

Conclusion

The choice between a personal loan and a business loan requires serious thought about our personal needs and circumstances. Though business loans offer a greater amount and low interest rate, personal loans lead when we require money with less formality and urgency.

We can see that Sydney’s lending market offers several options for both types of loans. Business loans are appropriate for established businesses seeking heavy funding with proper documentation. Personal loans are better suited for smaller amounts, faster approval, and more flexible funds.