India is home to a large number of start-ups. Entrepreneurs across the country invest their time, money and hard work to ensure that their business flourishes with time. Running a business comes with a huge amount of responsibility and a lot of challenges. A common issue faced by entrepreneurs is the lack of sufficient funds to expand their business. Most business owners resort to availing loans to get access to enough capital for business expansion. However, choosing between a business loan and a personal loan is often a matter of confusion for the entrepreneurs.
Here, we are going to evaluate various aspects of both the credit products. This can help the entrepreneurs take a well-informed decision after assessing their business requirement.
1. Ease of approval
- Availing a personal loan is usually easier than availing a business loan. Apart from basic eligibility, financial institutions just check the borrower’s credit score before approving their personal loan application.
- On the other hand, in case of a business loan, lenders examine the entrepreneur’s personal credit, business credit, business plan, age of the business and a host of other financial statements before approving the loan application. Hence, the entire process of availing a business loan can be time-consuming.
- Another advantage of availing a personal loan for business is that personal loans are usually unsecured. Therefore, entrepreneurs are not required to pledge collaterals while availing a personal loan.
- Whereas, small business loans are secured loans and therefore, if entrepreneurs are unable to pledge any collateral, it can lead to rejection of their loan application.
3. Interest rates
Since personal loans are unsecured loans, the interest rates associated with them are usually higher than that of business loans.
4. Loan tenure
Personal loans have a shorter repayment tenure as compared to business loans. Therefore, entrepreneurs may have to bear comparatively higher monthly installments. This, in turn, can severely impact the cash flow of a newly established business.
5. Loan amount
- In order to expand their business, entrepreneurs require a large amount of capital. With the help of a business loan, entrepreneurs can avail a higher loan amount.
- However, the amount availed through a personal loan will be lesser in case the business owner has an existing personal loan, home loan, vehicle loan, etc.
6. Use of the loan amount
Since a personal loan is a multipurpose loan, entrepreneurs may use it for an emergency personal need. This can lead to a lack of discipline and hamper the growth of the business. A business loan can enable entrepreneurs to avoid such problems.
It is recommended that entrepreneurs must access all the aspects of their business carefully before choosing a credit product. Also, they should compare various deals offered by different financial institutions before making the final decision. Lastly, it is advisable to read all the terms and conditions of the loan agreement carefully before signing it. This can be helpful in avoiding any inconvenience in the later stage.