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.
Benefits of Personal Loan
The main difference between personal and business loans is that the former is a multipurpose loan. Like a Business Loan, or in that case, any other loan such as a car loan, or a home loan, there is regulation regarding the use of funds.
With a small number of documents required, such as proof of ownership, income, and address, the loan is processed quickly and usually disbursed within hours. With no collateral attached, the borrower can breathe easy and focus on an effective repayment plan. Also, Personal Loans usually have certain basic conditions for eligibility such as age, monthly income or good credit history (reflected through credit score).
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.
Benefits of Business Loans
The most important benefit of a Business Loan is its attractive and reasonable interest rate. As with personal loans, lenders usually do not interfere with the use of the loan, if the money is invested in any business-related purposes. As a borrower, you are free to spend money according to your needs.
The most important feature of a Business Loan is that you do not have to share your profits with lenders unless they are investors. Banks and NBFCs are only concerned with the timely payment of instalments.
The main difference between Personal and Business Loans is that the first is an unsecured loan. Alternatively, a business loan can be secured or unsecured, depending on the amount of loan you require and from lender to lender. Generally, you do not need a collateral if the loan amount is low, but the same may be required if it exceeds a certain amount. The bank determines the credit limit for a secured and unsecured business, and this limit varies from lender to lender.
Personal Loan vs Business Loan
A few highlights of the difference between a Personal Loan and a Business Loan are as follows:
Choosing which is right for you
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.
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