The contrast in interest rates between personal loans and business loans has caught many a small business owner off guard.

With personal loans often advertised at around 6% APR, it can be quite a shock to receive a quote for a business loan of a similar amount at nearly double that rate, 12% APR.

Overall, a £10k personal loan from Santander costs £11,555 over five years while £10k as a business loan from Funding Circle cost £14,056 (sources: Lender’s online loan calculators, March 2025).  

Understandably, we’ve been asked more than once by small business owners: Why not just take out a personal loan instead?

It’s a valid question, and the most immediate answer is that most banks won’t allow personal loans to be used for business purposes. (There is one notable exception: the government-backed Start Up Loan scheme, which you can read more about here.)

However, we can imagine a scenario where an entrepreneur takes out a personal loan for planned home renovations, and then uses their personal savings – freed up as a result – to invest in their business.

There are two key considerations with this approach. First, do you have the accounting know-how to properly separate these funds? This would likely require multiple bank accounts and clear documentation. Second, does this strategy feel ethically sound to you? Is it clever financial planning, or a grey area that crosses into dishonesty?

If you are interested in exploring personal loans as a funding route, there are further factors to weigh up. While business loans generally come with higher interest rates, they also provide additional services and protections for you as the business owner.

What Do You Get With a Business Loan?

Higher credit limits

Typical personal loans from high street banks like Santander and HSBC are limited to £25,000, while Lloyds and NatWest may offer up to £50,000. In contrast, small business loans from banks and lenders working with the government’s Growth Guarantee Scheme can go as high as £2 million.

Wide variety of borrowing options

In personal finance, borrowing usually means taking a lump sum and repaying it monthly with interest. Business finance offers many more options, with products designed for specific business needs, such as:

• Revolving credit facilities: Withdraw funds as needed, repay, and borrow again.
• Invoice discounting: Access cash tied up in unpaid invoices.

Repayment options

Repayment methods can be tailored to your business’s cash flow. Examples include:

• Revenue-based financing: Repayments are made as a fixed percentage of your future sales.
• Venture debt: Repayments can be interest only for a fixed time, such as up to the next round of equity funding.

Personal protections

With secured business lending, the loan is tied to your business and its assets, not your personal credit profile. This separation protects your personal credit score, which is important for things like mortgages or personal finance.

However, some lenders require a Personal Guarantee (PG), particularly when loans are unsecured. A PG means you’re personally liable for repayment if your business cannot repay the loan, but your personal credit score is still separate. Insurance is available to mitigate this risk, and for loans under the government’s Growth Guarantee Scheme, your primary residence cannot be tied to the loan.

Tax deductable

Interest on business loans is tax-deductible, reducing your business’s tax bill. Personal loan interest does not offer the same benefit.

Conclusion

While the headline APR on business loans may seem discouraging, it’s important to understand the full picture. Business loans offer higher limits, greater flexibility, tax advantages, and protections that personal loans simply don’t provide.

If you’re considering using personal borrowing to fund your business, be sure to weigh the legal, financial, and ethical implications carefully. For many entrepreneurs, the added cost of a business loan is a worthwhile investment in stability, scalability, and peace of mind.

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