When looking to raise capital for one’s business venture, having funds in place is important. Most entrepreneurs resort to availing a business loan to meet this financial requirement. However, not many people are aware that you can use a personal loan as an alternative option. While business loans are specifically granted with keeping your entrepreneurship interests in mind, a personal loan can be availed for any reason.
So, which is better? And what exactly is the difference between personal loan and business loan?
Let us understand this in detail.
A personal loan is an all-purpose, unsecured type of loan. You can avail a personal loan for a number of reasons without having to provide any kind of collateral as security against it.
A personal loan is a great way to get quick financial assistance in times of financial crunch. You might have enough funds as savings, however, in some situations, you might find yourself in need of some extra funds. By availing a personal loan, in addition to giving you instant cash, you get access to numerous benefits that come with it. For a personal loan you would not have to provide any of your personal assets as collateral. It is always better to get a personal loan instead of borrowing from family and friends. Unlike other secured loans like home loans, car loans, or education loans, personal loans can be used for a variety of purposes.
Advantages of a Personal Loan
Easy application process
You do not have to provide any collateral against them
Minimal documentation is required to avail a personal loan
Can be used as a consolidated repayment option for all your existing loans
It is an excellent source of emergency funds
Disadvantages of a Personal Loan
Since no collateral is taken against it, the interest rates are relatively high
The amount granted as a personal loan is comparatively less as compared to what can be availed by other types of loans
You need to have a very good credit score to qualify for a personal loan
A business loan is granted for business purposes only. You can use a business loan to fund your start-up, expand the existing business infrastructure, fund your pay roll, or for any other business capital requirement.
Business Loans intend to fulfill the funding requirements of a business. This loan can be used for meeting working capital requirements, inventory and equipment purchase, and for other business-specific growth purposes. But with the simplification in the loan process, the major concern for the business owners is the repayment of the loan and its interest rates. Along with it, there are other worries looming due to the increase in tax with the surge in the capital.
Advantages of a Business Loan
Business loans offer tax benefits
They are granted at comparatively lower interest rates
They are available in different variants such as term business loan, standard business loan, etc.
Disadvantages of a Business Loan
Not all businesses qualify for a business loan. You have to ensure that you submit a robust business plan to convince the loan providers to grant you the loan.
The review process for a business loan application is considerably long. The loan providers go through your business credentials, including past financial statements, profit records, and general logistical expenses before sanctioning a business loan.
Most business loans require you to provide a collateral as a form of financial security against the loan.
You might not be granted the entire requested amount. Sometimes, banks or other financial institutes only grant 70%-80% of your requested business loan amount.
Since both personal and business loans have their share of advantages as well as disadvantages, how do we decide which is the better option?
To gain some perspective on this matter, the below table offers a comparison for business loan vs personal loan-
Ease Of Application
Easy application with instant approval
Lengthy application and review process.
No collateral required
You need to provide a collateral
High interest rates
Low interest rates
Short term loans
Short as well as long term loans
Major Eligibility Criteria
Good credit score, debt-to-income ratio
More focus on business credit than personal credit. You might be asked to provide business plans, account & profit statements, logistic reports, etc.
Restriction of Use
No restriction. Can be used for a number of personal reasons
Only to be used for business purposes
No tax exemption or tax deduction allowed on a personal loan in India
Tax exemption and tax deduction available on a business loan in India
Judging from the above comparison, choosing between a personal loan and a business loan is indeed a difficult decision. If you are comfortable with high interest rates and short loan tenure, a personal loan is the best option for you. However, if you want to avail a significantly larger amount and enjoy benefits such as tax exemptions and deductions on your loan, then opting for a business loan makes more sense.
For the sake of brevity-
Consider a business loan if:
You have an established business history and planning to get a loan for further upgradation, better infrastructure, etc.
You have a solid collateral to grant as a security against your loan
Your business isn’t new or you are planning to start a new venture
You do not have any material asset to keep as collateral but are comfortable to risk your personal finances for business
You have an excellent credit history
You want to cover business as well as personal expenses
For customized offers that meet your personal loan requirements, apply for the Personal Loan today!
Ultimately, the decision to apply for a personal loan or a business loan lies with the borrower. If you are unsure which option would be best suitable for your financial needs, get in touch with a financial advisor who can help make the decision easy for you. To know more about the various features of business loan as well as a personal loan, visit us at Finserv Markets today! Whether you are a salaried individual looking to start your own business or an experienced businessperson hoping to get additional funding to expand your business avenues, we at Finserv Markers will assist you in all your financial endeavors. To know more, visit now!
Finserv Markets, from the house of Bajaj Finserv is an exclusive online supermarket for all your personal and financial needs. Loans, Insurance, Investment and exclusive EMI store, all under one roof- anytime, anywhere!