A business needs credit for various purposes such as managing working capital needs, expansion and infrastructure expenses, investment in systems and equipment, etc. These requirements can mean large amounts of money and the business must ensure that the cost of capital is affordable and practical. Therefore, business loans are considered better equipped to finance business development than personal loans.
Key Differences Between Personal and Business Loans: At a Glance
1. Business Loan
Pros |
Cons |
|
Secure large loan amounts |
Difficult to obtain - especially for new businesses and entrepreneurs who are just getting started. |
2. Personal Loan
Pros |
Cons |
|
Easier to obtain |
Higher interest rates |
What is the difference between personal loan and business loan?
Some of the key differences between personal and business loans are as follows:
1. Interest Rate
Personal loans are designed by financial institutions to help meet a person's personal needs such as marriage, home repairs, or other emergency cash needs. The interest rates associated with personal loans are generally high. Personal loans may not be ideal for entrepreneurs as they can end up with a high cost of funding, especially if their business is in its infancy. In such a situation, a business loan can prove to be helpful for them.
2. Tenure
As far as repayment is concerned, a personal loan comes with a shorter tenure. On the other hand, business loans have a longer tenure. Thus, entrepreneurs may have to pay more as EMI per month while opting for a personal loan. This can affect the cash flow of the business and hurt its growth in the early stages.
3. Lending Terms
Financing a business with the help of a personal loan can also mean higher interest rates and associated EMI payments. In such cases, there is a higher chance of default which can bring cash flow troubles in future. This is why most business owners find it challenging to establish credibility in a personal loan and get better lending terms. This indicates that the business owner is better off with a business loan.
4. Use of Money
If business owners borrow a personal loan, they can use it for personal emergencies. This may indicate a lack of discipline and misuse of existing funds, especially when they are being used for situations not associated with driving business growth. A business loan can ensure that entrepreneurs do not have to deal with such problems.
Why is the demand for personal loans and business loans increasing in India?
India is considered one of the top breeding grounds for start-ups. Today it ranks third in the world in the start-up business category. With immense entrepreneurial potential and a passion for business, Indians are entering the start-up genre like never before. As capital becomes more affordable and vital to the growth of start-up businesses, today the market is flooded with many personal loans as well as business loan options.
The launch of government backed schemes like Mudra Loans is a testament to the kind of support businesses get from the government. It has managed to disburse approximately Rs. 6 lakh crores to around 12 crore people since the time of its launch. Young entrepreneurs often get confused while choosing between a business loan and a personal loan. While there is no easy answer, we help you choose the right loan product by listing the features and benefits of both.
Which loan is easiest to qualify for - a personal or business loan?
Personal loans can be easily approved as long as one has good credit and can show a steady flow of income. Businesses applying for personal loans must have an adequate debt-to-income ratio. In the absence of good credit, one can go for secured loans which require collateral commitment.
When it comes to business loans, excellent credit is the most important criterion to qualify for. Lenders may sometimes ask for personal and business credit scores. Businesses may also be required to show substantial annual revenue and number of years in the industry. Some online lenders may offer costly business loans to entrepreneurs who may not easily meet the criteria.
What is a government loan for business and how is it better than a personal loan?
For businesses that qualify for the government's credit guarantee schemes, they can easily avail a maximum of Rs. 1 crore. Thus, a business loan with a better interest rate than a personal loan may better suit the needs of the business. Personal loan of Rs. 1 crore can prove to be risky for a business that is just starting out.
While personal loans are available instantly, as long as the basic eligibility criteria are met, they are best suited for meeting an emergency financial need. It is better to avoid taking a personal loan to grow the business. Smart entrepreneurs would prefer to take a business loan instead of falling into the personal loan trap.
What is required for a business to get a loan?
The purpose of a loan and its urgency can influence decision making when selecting a business loan or personal loan. If the loan requirement is very high but the business is performing well, there are better chances of getting a business loan at reasonable interest. However, if it is an emergency financial need, a personal loan may be easily available as compared to a business loan. Based on the need and the quantum of need, entrepreneurs can choose between two available loan categories.
questions to ask
1. Can I use my personal loan for business?
Yes, you can use a personal loan to fund a business. However, we recommend checking if you qualify for a business loan, as it can offer you lower interest rates and more capital.
2. Which loan is best for business?
Businesses should ideally opt for business-specific loans such as working capital loans, start-up loans, business loans, equipment financing, etc. based on specific needs.
3. Is a Business Loan a Good Idea?
A business loan can be an easy way to raise capital for business needs. It is also advantageous in comparison to the cost of raising share capital. Business loans help accelerate business growth because businesses can get a higher rate of return than the interest payable on the loan.
4. Do banks give loans for starting a business?
Yes, many banks offer business loans to small and medium businesses, start-ups and even large organizations.
5. How long should it take to pay off a business loan?
Business loans may take 5-10 years or more to repay as they are generally of longer duration.
6. Is a business loan more expensive than a personal loan?
Personal loan interest rates are often higher than that of business loans. This is mainly due to the different application processes of each in addition to the collateral requirements.
7. How do I get finance to start the business?
Among the many financing options available to start a business, you can make use of personal loans, business loans, request funds from angel investors, family and friend contributions, government loan schemes, etc.
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