Personal Loan vs. Business Loan - All you Need to Know

By PolicyBazaar
  | Published: 15 April 2020 | Last Updated On: 29 December 2020

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Most businesses require financial resources in order to smoothly operate. Without funds, a company may not survive in a competitive market. If you are looking for the ideal loan for business funding, it is important to know what works best for you and your business.

Sometimes you may find yourself confused when it comes to choosing between a personal loan and a business loan. While they may have some similarities, learning their features and the differences will give you a better understanding of what suits your business needs.

What is a Personal Loan?

In simple words, a personal loan is a kind of loan that is given to an individual where the funds are borrowed at a fixed rate and repaid in installments. These loans are used for big purchases or even debt consolidation. This is an unsecured loan i.e., it does not require any collateral. Many small businesses avail a personal loan to fund or expand their business operations.

Pros

  • Easy Application: When you apply for a personal loan, sometimes, your loan gets approved in just a few hours.
  • Lower Costs: The providers tend to charge a higher interest rate on unsecured business loans. If you opt for a secured business loan, you will have to provide collateral. However, personal finance is often unsecured and comes with lower costs.
  • Flexible Usage: You can use a personal loan for multiple purposes.

Cons

  • High Personal Loan Interest Rate: If you have a good credit score, you can benefit from a lower personal loan interest rate. However, if you hold a weak credit score, lenders tend to offer you a higher personal loan interest rate.
  • Fixed Payment Structure: Unlike credit cards, personal loans have to be paid on the fixed due date.
  • Lower Lending Limit: The amount of money that can be borrowed depends on the limit fixed by the provider.

What is a Business Loan?

When a business is unable to meet its financial needs in order to support its operations and expenses, a business loan comes in the picture. With this loan, the debt repayment is as per the terms and conditions set by the lender and borrower.

Pros

  • Higher Lending Limit: The amount of money that can be borrowed under a business loan is higher than the amount that personal loan offers.
  • More Value is Offered: With a business loan, it is easy to separate business and personal expenses and manage them properly.

Cons

  • Difficult to Obtain for Start-ups: It is difficult to obtain a business loan for a company that has just started as the lenders require assurance for the repayment of the loan.
  • Approvals Take Time: Business loans, unlike personal finance, can even take months to get approved.

Choice for You

A personal loan is a better choice for you if:

  • You Have a Good Credit Score: The personal loan interest rate offered to you depends on your credit score. If you hold a high credit score, the rate offered is lower. While a personal loan does not require any collateral, it deeply affects your personal credit score.
  • You Are a Start-up: A new business may not have sufficient revenue history to show the lenders, which can lead to a higher rate charged on the business loan or the lender may ask for collateral.

The Bottom Line

Both kinds of loans – personal loans and business loans are a great help for your business. As an owner, the ultimate choice depends on your needs. before opting for any of the loans, it is important to evaluate your business’s growth opportunities and financial standing.