From business credit cards to investor loans, there are quite a few ways to raise funds to grow your business. The two most popular financing options are personal loans and small business loans, especially for business owners who do not want to turn to investors’ money or give up equity.
Both options are worth considering but deciding which one is right for you will depend on the specifics of your business. One needs to know that personal loans and business loans are designed for different purposes and have different eligibility criteria. They also affect your credit score differently. Loans are one of the most basic and popular services offered by banks.
A loan enables you to pay for different types of expenses and is of different types. Usually, a bank gives a loan and charges interest on it. You must repay the loan in Equal Monthly Installments (EMI), within the stipulated time. For a businessperson, there are numerous loan products at his/her disposal, for funding the business. So, what is the difference between a Personal Loan and a Business Loan? Let's find out.
What is a Personal Loan?
Whether it’s a planned event like a wedding or remodeling a kitchen, a contingency like a medical emergency, a Personal Loan can help you raise funds quickly. Personal Loans are provided by commercial banks and Non-Bank Financial Institutions (NBFC). A personal Loan becomes an effective option to meet all your stressful financial needs. It is an unsecured loan because it does not require you to have any collateral.
Advantages and Disadvantages of Personal Loan
Following are the advantages and disadvantages of a Personal Loan:
|
Advantages |
Disadvantages |
|
Flexibility: Personal Loans can be used for various purposes such as debt consolidation, travel, medical expenses, weddings, etc. |
Higher Interest Rates: Personal Loans typically have higher interest rates compared to secured loans like home loans or car loans. |
|
No Collateral Required: Personal Loans are unsecured, which means you don't need to provide collateral to secure the loan. |
Eligibility Criteria: Qualifying for a Personal Loan may require a good credit score and a stable income, making it difficult for some individuals to obtain. |
|
Quick Approval and Disbursement: Personal Loans often have a streamlined application process, and funds can be disbursed quickly. |
Fees and Charges: Personal Loans may have origination fees, prepayment penalties, or late payment fees, which can add to the overall cost of borrowing. |
|
Debt Consolidation: Personal Loans can be used to consolidate multiple high-interest debts into a single loan with a potentially lower interest rate, making it easier to manage debt. |
Risk of Overborrowing: Easy access to Personal Loans may lead some individuals to borrow more than they can afford, potentially worsening their financial situation. |
|
Flexible Repayment Schedule:
Personal Loans come with flexible repayment tenure, making it
easier to budget and plan for repayment. |
Impact on Credit Score: Failure to repay a Personal Loan on time or defaulting on the loan can negatively affect your credit score and future borrowing ability. |
It's important to note that the advantages and disadvantages may vary depending on the specific terms and conditions of the loan and the borrower's individual financial situation.
What is a Business Loan?
As the old saying goes, “to make money, you need money in the first place”. If you are planning to start or expand your business, a Business Loan can give you a good head start to finance your expenses. If you have an established business but plan to upgrade technology, invest some money in capacity expansion, or hire new talent, you can avail of a Business Loan and meet your needs.
Advantages and Disadvantages of Business Loan
Following are the advantages and disadvantages of a Business Loan:
|
Advantages of Business Loans |
Disadvantages of Business Loans |
|
Access to Capital: Business loans provide entrepreneurs with access to the necessary capital for expanding or upgrading their businesses. |
Qualification Requirements: Lenders often have strict qualification criteria for business loans, including a solid credit history, business plan, and financial documentation, which can be challenging for startups or small businesses. |
|
Business Growth: With additional funding, businesses can invest in new equipment, inventory, marketing, or hiring, which can contribute to business growth and increased profitability. |
Potential for Debt: Taking on a business loan means assuming a debt obligation, which requires timely repayments and can impact cash flow. |
|
Flexibility: Business loans offer flexibility in terms of loan amount, repayment period, and purpose of use. This allows businesses to tailor the loan to their specific needs and financial goals. |
Interest Rates and Fees: Depending on the lender and the borrower's creditworthiness, business loans may come with high-interest rates and additional fees, increasing the overall cost of borrowing. |
|
Building Credit History: Consistently repaying a business loan can help establish and improve the business's credit history, making it easier to obtain future loans or financing on favorable terms |
Risk of Default: If a business faces financial difficulties and cannot meet loan repayments, it can lead to default, damaging the business's credit rating and potentially resulting in legal consequences. |
It's important to note that the advantages and disadvantages of business loans can vary depending on factors such as the loan type, lender, and specific terms and conditions. Before applying for a business loan, it's essential to carefully evaluate the needs of your business, assess your financial capacity, and thoroughly review loan options to make an informed decision.
Personal Loan vs Business Loan
A few highlights of the difference between a Personal Loan and a Business Loan are as follows:
- The main difference between personal and business loans is
the requirement based on how well the bank determines your
eligibility. Lenders usually check your credit score and income
level on Personal Loans and transfer the loan in small amounts. In
the case of Business Loans, you may be required to provide business
plans, bank accounts, profit statements, etc. The focus is on the
business rather than on the individual.
- A personal
loan can be used for any purpose, and you do not have to give any
details to the lenders when you receive it. However, for a Business
Loan, you need to provide the reasons and how you intend to use the
loan to further your business.
- When comparing
personal and business loans, it should be noted that the first is
usually an unsecured loan, where no collateral is required. About
Business Loans, banks may ask you to mortgage your office premises,
industries, etc., if the loan amount is high. There are no tax
benefits on Personal Loans, but the interest paid on
a Business Loan is tax-deductible.
- Another difference between a Personal Loan and a Business Loan is that the first one is usually a temporary loan, with a repayment period of 5 years. A Business Loan can be a short-term or long-term loan, with a tenure as long as 15 years or even longer.
Should I Take a Business Loan or Personal Loan?
When a Business Loan Can Make Sense
A business loan can make sense in various scenarios such as
- If you're looking to expand your business, purchase equipment, invest in inventory, or manage cash flow gaps, a business loan can provide the necessary capital.
- Additionally, if you have identified growth opportunities or need funds to seize a time-sensitive business opportunity, a Business Loan can be an ideal choice as lending limits are significantly on higher side on a Business Loan as compared to a Personal Loan.
- If you want to build a good business credit, then you can do that by opting for a Business Loan and repaying it on time.
When a Personal Loan for Business Can Make Sense
While Business loans are typically preferred for business-related expenses, there are instances when a personal loan can make sense for business purposes.
- If you're a small business owner with limited credit history or facing challenges in obtaining a business loan, a personal loan can be a great alternative.
- Additionally, if the loan amount needed is relatively small or the funds will be used for personal expenses intertwined with the business, such as a home office renovation, a personal loan can be a viable option.
If you require funds immediately to meet any of your time-sensitive business-related expenses, then you can opt for a Personal Loan. As some lenders can offer funding within 24 hours, provided you meet their eligibility requirements.
Why to Choose Poonawalla Fincorp?
Banks, NBFCs, and online lenders offer personal and business loans. Choosing which lender to borrow from depends on the interest rate, pre-payment charges, processing fee, level of customer service and other factors offered by various lenders.
Interest rates
When you apply for a loan, interest rates are the first things you consider. The lower the interest rate, the smaller the EMIs you pay and the easier it is to pay.Since a personal loan is unsecured, interest rates on personal loans can be higher compared to other types of loans. Conversely, business loans may be unsecured or unsecured, depending on the lender you choose.
Documents
Lenders need detailed documentation to authorize business financing. This includes your company's PAN, income tax returns or ITRs for the past 2 years, affidavit, verified balance sheet, KYC business papers, profit, and loss accounts for at least 2 years, etc. Compared to this, personal loans require smaller documents such as proof of residence and ID, income documents, etc.
Loan approvals and disbursements
Today’s world is all about speed, hence the speed of disbursal and processing time are crucial factors for zeroing on a lender. Hence, you must choose a lender wherein all you need to do is go to your lender's website, apply for a loan, and upload the required documents. You must choose the lender that best suits your payment ability and financial needs. At Poonawalla Fincorp, we offer fast personal and business loans with competitive interest rates.
There are certain lenders such as Poonawalla Fincorp that extend Business Loan without any collateral and at attractive interest rates. Additionally, the entire process is hassle-free, requiring minimum documentation, with quick disbursal and with complete transparency with respect to charges and fees. Hence, you may Apply Now for a Business Loan with Poonawalla Fincorp easily.