When a small business needs extra capital, owners often assume a business loan is the only route, but a personal loan is sometimes used instead, particularly by sole traders and very early stage businesses. The two work very differently in terms of eligibility, liability, and cost. This guide breaks down the real differences so you can choose with confidence.
For a wider view of how loans fit alongside other funding options, see our business finance for beginners guide.
What Is a Business Loan?
A business loan is finance provided directly to a company, assessed primarily on the business’s financial health and trading history rather than the owner’s personal credit alone. Business loans can be secured against company assets or unsecured, and typically offer larger amounts and longer terms than personal borrowing.
What Is a Personal Loan Used for Business?
A personal loan used for business is borrowed in an individual’s own name, with the individual solely responsible for repayment regardless of how the business performs. Personal loans are usually assessed on the applicant’s personal credit history and income, and most lenders restrict how the funds can be used, with some prohibiting business use entirely in their terms and conditions.
Business Loan vs Personal Loan: Key Differences
| Factor | Business Loan | Personal Loan |
|---|---|---|
| Assessed On | Business trading history and finances | Individual credit score and income |
| Typical Amount | Larger, often into six figures | Usually capped lower, commonly up to £25,000 to £50,000 |
| Liability | The company, unless a personal guarantee is signed | The individual, in full |
| Application Speed | Slower, more documentation required | Typically faster |
| Credit Building | Builds business credit history | Only affects personal credit history |
| Tax Treatment | Interest is usually tax-deductible | Interest is not usually tax-deductible for business use |
| Best Suited To | Established or scaling businesses | New sole traders with limited trading history |
Why Newer Businesses Often Consider Personal Loans
Lenders generally look for a trading history before approving a business loan, which puts brand new businesses at a disadvantage. A personal loan sidesteps this, since it is assessed on the individual’s own financial history rather than the business’s. This is one reason government backed schemes such as the Start Up Loan, delivered through the British Business Bank, are structured as personal loans even though the funds are intended for business use, combining accessible eligibility criteria with a fixed low interest rate and free mentoring support.
The Risk of Using a Personal Loan for Business
Because personal loans make the individual solely liable, a struggling business does not reduce the obligation to repay. This differs from a limited company business loan without a personal guarantee, where the company, not the owner personally, carries the debt if the business fails. Business owners considering a personal loan for business purposes should also check their lender’s terms, since some explicitly prohibit business use and could withdraw the loan if this is discovered.
Personal Guarantees: Where the Two Options Overlap
Many business loans for newer or smaller companies require a personal guarantee, meaning the business owner agrees to personally repay the debt if the company cannot. This narrows the practical difference between the two options considerably, since both can ultimately expose personal finances, even though one is structured as a business loan and the other is not.
How to Decide Between the Two
- If your business has at least a short trading history and reasonable turnover, a business loan is usually more cost effective and better for building business credit
- If you are a brand new sole trader with little trading history, a personal loan, or a government backed Start Up Loan, may be the only realistic option
- If the amount needed is relatively small and speed matters more than cost, a personal loan may be quicker to arrange
- If you want to protect personal assets as far as possible, an unsecured business loan without a personal guarantee is generally preferable, where available
Frequently Asked Questions
Is it illegal to use a personal loan for business purposes in the UK?
It is not illegal under UK law, but most personal loan providers restrict funds to personal use in their terms and conditions, and using the loan for business purposes could breach that agreement.
Which is cheaper, a business loan or a personal loan?
This varies by lender and applicant, but business loans are often regarded as lower risk by lenders once a business has an established trading history, which can translate into more competitive rates than an equivalent personal loan.
Can a sole trader get a business loan?
Yes, sole traders can apply for business loans, though newer sole traders with limited trading history may find personal loans or government backed schemes such as the Start Up Loan more accessible.
Does a business loan affect my personal credit score?
A business loan taken out under a limited company generally does not appear on the owner’s personal credit file, unless a personal guarantee is signed and subsequently called upon.
Final Thoughts
The right choice between a business loan and a personal loan depends heavily on your trading history, how much you need to borrow, and how much personal risk you are willing to take on. Newer businesses often have little choice but to start with personal or government backed borrowing, while established businesses generally benefit from moving to dedicated business finance as soon as they qualify.
About the Author
This guide is produced by the editorial team at Riser, covering practical business finance, investment, and entrepreneurship topics for UK founders and business owners.
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