Business loan vs personal loan: which is right for your business?

The difference between a business loan and a personal loan comes down to purpose and assessment. A business loan funds a business purpose and is judged on the business: its turnover, bank statements, security and plans. A personal loan funds personal spending and is judged on your personal income and outgoings. Mixing the two can work in a pinch, but it often creates more trouble than it saves. For the basics of how business lending fits together, start with our how business loans work section.

What’s the difference between a business loan and a personal loan?

Here’s how the two compare on the points that matter most to a business owner:

	Business loan	Personal loan
Purpose	Business use: stock, equipment, wages, growth, tax	Personal use: car, holiday, household
Who borrows	Company, trust, partnership or sole trader	You, as an individual
Assessed on	Turnover, bank statements, BAS, security	Personal income, expenses, credit file
Typical size	Small to very large, depending on security	Modest, limited by personal income
Security options	Property, equipment, receivables, or unsecured	Usually unsecured or secured by a car
Guarantee	Directors usually guarantee company loans	You’re the borrower, so no separate guarantee
Repayment rhythm	Daily, weekly, fortnightly or monthly	Usually fortnightly or monthly
Regulation	Mainly business purpose, outside the National Credit Code	Consumer credit rules apply
Tax records	Clean link between loan and business spending	Use must be traced and apportioned

Can you use a personal loan for business purposes?

You can sometimes, but it’s rarely the best tool. Three issues tend to come up:

• The contract. Many personal loans state they’re for personal, domestic or household purposes. Telling the lender it’s for a car and then buying stock with it can put you in breach.
• The size. A personal loan is capped by what your personal income can support. If the business pays you modestly to reinvest profit, your borrowing power on a personal loan may be far below what the business could raise itself.
• The records. The ATO generally looks at how borrowed money is used. If personal loan funds go into the business, you need records that trace that use to support any interest claim. Our page on whether business loan interest is tax deductible covers the general rules.

Where a personal loan does sometimes make sense is very small, one-off spending by a sole trader who has no business banking history yet. Even then, a small equipment loan or starter line of credit is usually tidier.

Why do lenders treat business and personal borrowing differently?

Credit used mainly for business purposes sits outside the National Credit Code, which governs consumer lending. That’s why business loans don’t carry a comparison rate and why the documents and assessment look different. It also means business lenders can structure facilities around cash flow, for example weekly repayments timed with takings or a line of credit you draw and repay as needed.

When you apply, you’ll typically sign a declaration that the loan is predominantly for business purposes. Make sure that’s true. If part of the money is for something personal, say so, because the lender may need to structure that portion separately.

How does each type affect your credit file?

Both usually involve a check of your personal file, since most small business loans need a director’s guarantee. The OAIC notes that your report can contain information about commercial credit you’ve applied for, alongside consumer credit. Repayment history on consumer credit, such as a personal loan, is recorded on your personal file. The credit score page explains what lenders look for on both.

Not sure which structure suits what you’re funding? Ask a specialist before you sign anything; there’s no credit check involved in asking.

Why keep business and personal money separate?

The ATO recommends considering a separate bank account for your business so business expenses come out of it and private expenses don’t. For a company, partnership or trust, business.gov.au says a separate account is a must for tax purposes. For sole traders it’s optional, but strongly recommended.

Separation helps your borrowing too:

1. Cleaner bank statements. Business lenders read your statements line by line. Groceries and school fees mixed with supplier payments make turnover harder to read and can lower what you’re offered.
2. Easier deductions. Interest and fees on a business facility link directly to the business.
3. Fewer company tax headaches. If company money is used privately, the ATO says it must be treated properly, for example as salary, a dividend or a loan. Loans from a private company to a shareholder generally need to be repaid or put on complying terms before the company’s tax return is due, under Division 7A.
4. A clearer picture for you. You can see what the business actually earns.

Should you borrow against your home for the business?

Using your home as security for a business loan is very common in Australia. The RBA reports that new small business loans backed by residential property are, on average, four and a half times the size of loans secured by other assets. That’s different from topping up your home loan and spending it on the business. A properly documented secured business loan keeps the business purpose clear, while a home loan top-up can blur personal and business debt and complicate tax.

Either way, understand that putting the home up as security, or signing a director’s guarantee, links your personal position to the business’s performance.

An illustrative example

Illustrative only. A mobile dog groomer operating as a sole trader for eighteen months wants $35,000 to fit out a second van.

• Option one: a personal loan. The bank assesses her taxable income, which is modest after expenses, and offers $20,000. She’d need to top up from savings.
• Option two: an equipment loan in her name as a sole trader. The financier looks at her business bank statements, the van as security and her ABN history, and approves the full amount with the van as collateral.

The second option fits the purpose, keeps records clean and preserves her savings as a buffer. Our business car loan and sole trader pages cover this kind of deal.

What about credit cards and buy now, pay later for business costs?

Plenty of owners put business costs on a personal credit card or a buy now, pay later account because it’s quick. For small, short-term purchases that are cleared within the interest-free period, that can be convenient. Over time, though, it creates the same problems as a personal loan, only faster:

• Cost. Revolving card debt is usually one of the dearest forms of borrowing, and carried balances add up quickly.
• Your credit file. The OAIC notes that buy now, pay later services are now treated as credit and appear on credit reports, and high card limits can count against you when a lender assesses what else you owe.
• Records. Personal card statements full of business purchases make deductions harder to support.
• Borrowing capacity. Lenders see the limits, not just the balances, so unused cards still reduce what they’ll lend.

If you find you’re regularly using personal credit to cover business gaps, a small business line of credit usually solves the underlying problem more cheaply and keeps the records clean.

Which should you choose?

Choose a business loan when the money is for the business, you want the amount sized on business performance, or you need repayments that fit business cash flow. Choose a personal loan only for genuinely personal spending, or for a very small, short business need where you’ve checked the contract allows it and your accountant is comfortable with the records.

Ready to fund the business properly?

If the money is for the business, it’s worth borrowing as a business. Check what your business could qualify for in a 60-second enquiry. No credit check runs when you ask, your information goes only to a lender that actually suits your situation rather than being shopped around, and a real specialist will call you back. Tell us exactly what the funds are for and how the business is set up, so the match is right first time.