Business loan or personal loan: which should fund your business?

When you first start out, the line between “my money” and “the business’s money” can feel blurry, especially if you’re a sole trader. So it’s a fair question: if you need funds for the business, should you just grab a personal loan? This lesson helps you decide.

How are the two loans assessed differently?

This is the heart of it.

A personal loan is assessed on you: your wage or salary, your living expenses, your other debts and your credit history. The lender’s question is, “can this person repay from their personal income?”

A business loan is assessed on the business: how long it has traded, what flows through its bank account, its tax position, and whether there’s security. The owner’s credit history still matters, but the business’s cash flow is the main character.

That difference leads to very different results for the same person.

Illustrative example. Two friends each want $40,000.

• Priya works full time as a nurse and has just started a weekend photography business. Her business has three months of income. A personal loan based on her wage may be the more natural fit for now.
• Tom is a full-time electrician who’s been trading as a sole trader for three years, with steady deposits into a separate business account. A business loan sized on that turnover is the natural fit, and it keeps his business finances in one place.

(Names and figures are illustrative.)

Side by side: personal loan vs business loan

	Personal loan	Business loan
Designed for	Personal purposes	Business purposes
Assessed mainly on	Your wage and living costs	Business turnover, bank statements, history
Typical size	Limited by your personal income	Unsecured typically $5,000–$500,000; property-secured $20,000–$5,000,000
Security	Often none, or a car	None, or residential/commercial property
Records	Mixes with personal finances	Stays with the business
Effect on future home loans	Counts against your personal borrowing	Can still be considered, but business debt is kept separate

Why keeping business debt in the business helps

business.gov.au notes that keeping private and business transactions recorded separately can save you time and money when preparing activity statements and tax returns. It also says partnerships, companies and trusts must have a separate business account, and strongly encourages it for sole traders.

A business loan paid into, and repaid from, a business account keeps everything tidy:

• your bookkeeper or accountant can see exactly what the loan paid for
• claimable interest and costs are easier to identify
• the next lender sees a clean story of borrowing and repaying
• your personal finances stay yours

If you’re still using one account for everything, that’s the first thing to fix before borrowing. Our lesson on what lenders look at in your bank statements explains why.

Want to know whether your business could borrow on its own track record? Ask us in about 60 seconds. It’s a no-credit-check conversation with a real person.

When might a personal loan make sense?

Honesty matters here, so let’s be fair to personal loans. One might be reasonable if:

• the business is so new there’s no trading history yet
• the amount is small and you can comfortably repay it from your wage
• you’re testing an idea before committing to it as a business

Even then, keep a clear note of what the money paid for, and think about switching to business finance once the business has its own track record.

When is a business loan the better choice?

A business loan usually wins when:

• the business has been trading through its own account for a while
• you need more than your wage alone could support
• you want the business to build its own borrowing history
• you own property and want to use it for a larger business purpose
• the business is a company or trust, which should borrow in its own name

Company or trust borrowers will also meet the idea of a personal guarantee, which lesson nine explains.

Quick check: which one fits you right now?

Run through these questions. Mostly “yes” answers point towards a business loan; mostly “no” answers suggest the business may need a little more history first.

1. Has the business been trading for several months or more?
2. Does its income go into an account used only for the business?
3. Would you be comfortable showing a lender the last six months of that account?
4. Is the money clearly for a business purpose, like stock, equipment or a fit-out?
5. Would the repayments come from business income rather than your wage?

If you answered “no” to the second question, fixing that is a quick win (and one of the first things our loan-readiness quiz will flag). Opening a dedicated business account today means that in a few months you’ll have exactly the kind of statements a business lender likes to read.

Ready to let the business borrow on its own merits?

If your business has been trading, it may be able to borrow based on its own income, which is often simpler and more sensible than stretching your personal finances.

Find out with a one-minute enquiry. We don’t run a credit check when you ask, and your details aren’t handed out to a string of lenders. A real person looks at your business, explains what it could borrow on its own track record and tells you honestly if a personal loan would actually suit you better. Accurate answers help us get that call right.

See what your business could borrow →