Business vs personal loan: Finding the right fit for your small business

When you’re running your own business, it can be easy to feel like you and your company are one and the same – even when it comes to borrowing. Recent research found that 39% of business owners take out personal loans to support their business. Here we’ll take a look at the key differences between a small business loan and personal loan to help you find the right finance.*

What is a business loan?

A business loan is a financing product specifically designed to provide funding to companies rather than individuals. These loans are typically used to cover business-related costs such as hiring staff, purchasing stock, renting premises, or investing in marketing. Lenders are generally quite flexible on what you spend it on – as long as it’s for your business.

Providers are also becoming more diverse, with 61% of finance brokers submitting over half of their SME loan applications to alternative lenders in 2025.

Business loans have the advantage that they are designed around business use-cases – their interest rates, repayment terms and underwriting are all based on your company, which can make them much more flexible.

What is a personal loan?

A personal loan is an financial product designed for individual use. When you take out a personal loan, the contract is between the lender and you as an individual, not your company.

From an entrepreneur's point of view, personal loans are familiar, sometimes faster than traditional business loans, and more cost-effective than some other high-interest options, like credit cards.

Note – some lenders’ terms and conditions forbid using funds for business, and going against this could lead to a demand for immediate repayment. In addition, you miss out on several key benefits – especially with regards to tax (more on this below).

Business loan vs personal loan: key differences

To decide which route is best for you, it is helpful to look at the structural differences between these two types of finance.

1.  Interest rates: Bank of England data puts new business loan interest rates around 2.5% per annum lower than new personal loans, combining data from secured and unsecured loans**. For business borrowers, secured business loans (which use assets as security) can offer even lower rates, making them cheaper to service in the long term.
2. Tax treatment: Business loan interest and fees are tax-deductible expenses that reduce your corporation tax bill. Personal loan interest is rarely deductible, meaning you pay the gross cost without tax relief.
3. Size and term limits: Personal loans are generally capped at around £25,000. Business loans are designed for scale, often offering up to £1,000,000, as well as terms from a few months to 25 years. Note, the precise amount and term offered will vary with individual circumstances.

Pros and cons of business loans

Pros:

• Tax deductible costs: Interest payments and arrangement fees can be offset against your profits to reduce your corporation tax bill.
• Separation of finances: Keeps a clean line between personal and business funds, simplifying audits and tax returns.
• Built on business credit: You can use your business’s credit score rather than your own – to potentially borrow more than you could personally. And repaying on time can enhance your company’s credit rating.
• Flexible terms: While many business loans come with fixed repayment periods of one to several years, alternative lenders often take a more flexible approach. For instance, iwoca allows businesses to hold a loan for as little as a day, repay early whenever they choose, and never charge early repayment fees.

Cons:

• Principal not deductible: You can’t claim tax back on the repayment of the loan capital (the principal amount).
• Strict eligibility: Lenders often require financial statements and a demonstrated trading history (6 - 12 months minimum), which can be a hurdle for new startups.

Pros and cons of personal loans

Pros:

• Simpler application: Requires fewer checks and less paperwork than a full business loan application.
• No business credit needed: Ideal for founders with no trading history, as approval is based on your personal credit score.

Cons:

• Higher cost: Interest rates for personal lending are generally higher than business lending.
• No tax relief: You cannot typically deduct interest costs from your corporation tax bill.
• Personal risk: Defaulting directly damages your personal ability to borrow in the future.

Which loan should you choose?

The choice between a business loan vs personal loan largely depends on the stage of your business and your financial needs.

You should consider a business loan if:

• You need a larger amount of capital, or a longer time to repay the money.
• You want to maximise tax efficiency by deducting interest and fees from your taxable profits.

You should consider a personal loan if:

• You are a very early-stage startup with limited funding needs.
• You lack a business credit history but have a strong personal credit score.

What to consider before applying

Before signing on the dotted line, think through what you want to use the money for, how you want to repay it and which lenders you want to approach.

• Which lender suits your needs: Lenders come in all shapes and sizes. Some may allow personal loans for business-use, but business loans may be easier to fit around your needs. Reading reviews on business and personal loan providers can give useful insight into customer service and overall user experience.
• Use case and timing: Consider how much you need, how long you will reasonably need to repay it, and what support might be necessary – a business loan will offer more of all three.
• Flexibility: Business needs often change. So consider loans that allow you to repay early without heavy penalties. Some lenders charge fees for early repayment, while others offer it without charge.

Summary: Is a business loan or personal loan right for you?

While personal loans offer a route for those just starting out or needing smaller sums, business loans provide the targeted capital, security, and flexibility to work around your planning.

In short, choose a business loan if you want to separate your finances, build business credit, and access larger sums. Choose a personal loan only if you are a new startup with no trading history and need a small amount of cash quickly.

*This article is in collaboration with iwoca. It’s intended for informational and educational purposes only and does not constitute financial advice.

**Money and Credit - December 2025”, Bank of England, 30 January, 2026, https://www.bankofengland.co.uk/statistics/money-and-credit/2025/december-2025