Financing for business purchases: what are your options?

When you own a business, there are several financing options available to you to help you get your business off the ground and keep operations running smoothly. Two of the most common are business loans and personal loans. 

A business loan is a type of finance specifically designed for business purposes. A business, or a sole trader, may take out a business loan to cover expenses they are unable to pay for upfront. Such expenses could be associated with growing the business or managing cash flow.

A personal loan is a type of finance that consumers typically reserve to help fund the purchase of big-ticket items, like a car, holiday or wedding. However, as a business owner, you may be able to use a personal loan for business purposes, depending on the loan provider’s lending criteria. 

Many lenders limit what you can do with one of their personal loans, to help reduce their financial risk. So, you may find that your preferred lender does not allow for personal loan products to be used for business purposes.

The two types of finance do, however, have similarities in the way they work, including:

  • Both are money borrowed from a financial lender
  • Can be secured or unsecured
  • Have either fixed or variable interest rates
  • Typically have fees attached
  • Are repaid over a fixed term

Disclaimer: Please note that at the time of writing, RateCity does not currently have business loans on our comparison tables. Speak to your preferred lender directly for more information on a business loan. 

Choosing between a business loan and a personal loan

There are a few key factors to consider when determining whether a business loan or a personal loan may be a better fit for you. 

Age of the business

When applying for a business loan, you’ll likely need to provide more information than you would for a personal loan, such as a full business plan, complete with details of the business’s income and expenses.

The lender may also consider the level of risk in your industry (e.g. niche markets may be considered riskier than more stable industries), and the relevant experience of you and your partner(s) when assessing your business loan application (e.g. if you’re buying a restaurant, but you haven’t worked in hospitality before, that may raise a red flag).

If your company is established with substantial revenue history that can be shown to a lender, a business loan may suit you better. However, if you're just starting your business, a personal loan based on your personal credit history may be your only option.

Level of risk

As the name implies, a personal loan is taken out by an individual person and not a company – unlike a business loan. This means that the responsibility for paying off the personal loan will fall entirely on you. 

Even if your business fails through no fault of your own, it’s your personal finances and your credit rating that will bear the financial consequences, which may make it difficult for you to borrow money in the future. 

Borrowing limits

Personal loans are often assessed based on your ability to repay the loan on your current income, while potential future income (such as money made by a business) isn’t taken into account. This means that the upper borrowing limit of a personal loan is generally much lower than that of a business loan.

If you’re looking to secure a significant sum of money, a business loan may be more fortuitous as it will be based on business revenue forecasting (among other factors), as opposed to your individual income. 

Loan term

It’s also worth noting that personal loans typically have loan terms of one to five years, whereas business loan terms range from one to 30 years for high loan amounts. This is the same loan term as most mortgages. 

If you’re after a significant sum, you’ll want to carefully consider the ongoing costs associated with a longer-term business loan. This includes budgeting for ongoing repayments, as well as interest charges and fees, over up to 30 years.

At the end of the day, choosing between a personal loan and a business loan will depend on your individual situation, and the situation of your business. Be sure to consider all risks before making your decision.

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The specifics around what you can use a personal loan for in your business will ultimately depend on your loan provider’s lending criteria. 

In some cases, you may not have restrictions on what you can use the funds for within your business, while in other cases, you will. Check with your preferred personal loan provider for more information on potential limitations.

Can you use a personal loan to purchase a business?

It may be possible to use a personal loan to buy a business, though depending on the size of the business you’re buying and the status of your personal finances, there may be other finance options available to choose from.

One of the first things to check before applying for a personal loan to buy a business is whether your chosen lender provides personal loans for this purpose. Some lenders may not be willing to take the financial risk of lending you money to buy a business that may or may not succeed, leaving you unable to pay back your loan.

It’s also important to check whether your preferred lender’s upper borrow amount limit will allow you to borrow enough to make the purchase. Business loans tend to have higher borrowing limits than personal loans.

Are personal loans for business ideal for a start-up?

If you’re a sole trader, a personal loan can sometimes allow you to get a start-up business off the ground. However, this does leave you with repayments and financial risk to manage as an individual, which could be difficult if your business is not as successful as you’d hoped.

Whether using a personal loan for your start-up is the right move will depend on your individual circumstances. Consider reaching out to a financial adviser for more personalised guidance.

How do you get a business loan?

Getting approved for a business loan can be a fairly simple process if you’re prepared ahead of time. Consider taking the following steps before applying:

  1. Get clear on how much you wish to borrow and how long it will realistically take you to repay.
  2. Choose between a secured or unsecured loan and decide whether a fixed or variable interest rate is right for you.
  3. Compare your business loan options, including different loan products' interest rates, fees and extra features.
  4. Prepare any required documentation. This may include your business plan, financial statements, proof of income, bank statements and identification documents.
  5. Consider consulting with a financial adviser or other relevant industry professional if you have any questions or concerns.

This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.