Understanding the difference between personal and business loans is critical when managing debt in Canada. Since too much debt can be crippling, it makes sense to collect as little debt as possible.
But while trying to avoid debt is admirable, it’s also near impossible for the average person. Two of the most common types of debt Canadians accumulate are:
The same is true in business. An owner may encounter situations where they’ll need to spend more than they have on hand. Some types of these situations are when you need to purchase new equipment, hire new staff or even buy inventory. If you’re in a similar position, you’ll be thinking of applying for financing, usually from a bank or a private lender. But which loan should you get, a business or personal one? From who, a bank or a private lender? Does it matter? Let’s take a closer look.
A personal loan is precisely what the name indicates: a loan for personal use. Personal loans are a lump sum of money that, if approved, is given to you to do whatever you’d like to with it.
Of course, the “personal” in personal loans means that the intention is to give people some financial help with matters not related to their business. If you’re thinking of renovating your kitchen or even just want to help out a relative in need, you can do with it as you please. Their requirement criteria are flexible making them very appealing and easy to get. This is because of the non-business nature of the loan—and usually the fact that smaller amounts are involved—personal loans don’t often have the same strict requirements for business financing.
You would take a business loan to pay for business expenses. The amount you can borrow is higher since business expenditures are usually big investments. If you’re looking to renovate your store, buying new equipment, or seeking funds to hire staff, business loans can support all of these.
Of course, because of the professional nature of business loans, that also means there’s an added level of complexity and qualification to get business loans. Good business credit is essential, and many more options such as variable rates, interest costs, and payment options and structuring are going to factor into your loan amount. You may even need to provide collateral for some types of business loans or even get specific types of loans, such as equipment loans. You’ll also need to open a business bank account in order to receive your business loan from a lender.
Looking at all this, you might think to yourself, “why shouldn’t I just use personal loans all the time if business loans are more complex and rigorous?” One answer to this question is the liability. It’s true that personal loans can be used for anything you like, including investing in your business. However, there’s one big catch. A personal loan leaves you and your personal finances liable for anything that goes wrong.
A business loan, once granted, is intended to be used by your business. Meaning, that if you are unable to return the borrowed amount, it’s your business that’s held responsible. Having the business held responsible, your personal credit score remains protected. On the other hand, with personal loans, the bank has the right to attempt to collect that debt from you personally, this includes any assets owned by you. This in turn negatively affects your personal credit score.
To summarize, business loan’s risk is “contained” within the company. While personal loans have personal consequences for you and your private finances.
Ultimately, it’s up to every person to decide whether or not the risk is worth the reward. For some, a personal loan used to cover a business investment is fast, makes sense, and is easy to address. For others, however, using personal loans instead of business loans puts you at real financial risk that’s not worth taking.
Advice and research for Canadian small businesses from our expert team