Business loan vs personal loan: What’s the difference?
A personal loan is a short-term loan obtained to meet financial emergencies. You can even name it an emergency loan. Borrowers have to repay their loans in a limited period (1-7 years).
Banks do not ask for insurance or personal loan collateral. Since these are unsecured loans; High-interest rates. Personal loan rates range from 14-21 percent per year. Typically, a personal loan can be used on something, although lenders may ask the reason for your application.
A business loan is a loan provided for commercial purposes. Business loans can be used for business expansion, working capital requirements, etc. Secured business loans have a lower interest rate than unsecured business loans. It can help differentiate your business and personal finances, which is especially important as the business grows.
It can limit your liability, depending on the personal loan, should a business default or other financial difficulties arise during the loan period. Getting a business loan can be difficult If your business has not established its credit or if you have a personal history that is less-than-stellar personal cred. The process can be tedious and lengthy, full of paperwork and rejection.
A Business loan and a personal loan operate separately, so ideally, there should not be compared between the two.
What is the difference between a Personal loan and a Business loan?
Fundamentally, there are two broad categories of the loan market: retail loans and Business loans. Loans given to individual consumers are known as retail loans. Business loans, on the other hand, are loans given to businesses or companies to meet their running costs and other expenses.
The personal loan falls into the retail loan group, and as the term ‘personal’ suggests, a personal loan is offered to borrowers to meet their personal/financial needs. In individual cases, the purpose of use may or may not be defined, and the person can use it for anything. However, a corporate loan falls into the second category of business loans. A corporate loan is for institutions and businesses to meet their daily operating costs.
What is the interest rate on each loan?
Whether it is a business loan or a personal loan, the interest rate is never determined. The price varies according to each loan application, depending on the applicant’s income, credit score, loan-to-income ratio, credit history, etc. The same provision also applies to corporate loans.
So, the interest rates on personal loans vary from 10 percent p.a to 19 percent p.a. The interest rate for business loans can range from 11 percent p.a to 35 percent p.a.
Note: You can use a personal loan to meet your business needs, but vice versa is not possible.
Let’s dive a bit more into this
Interest Rates: A personal loan is a commodity created by financial institutions to meet one’s personal needs, such as marriage, home renovation, or immediate need for cash. The interest level is usually high. Entrepreneurs who opt for a personal loan against applying for a business loan will promote an increase in the cost of funds that do not help the newly incorporated business.
Shorter Tenure:A personal loan usually has a shorter repayment period than a business loan. It means that entrepreneurs have to pay more money per month in terms of EMI. This effect on cash flow is not favorable for enterprises that have been active for a short time.
Terms of Future Lending:If an entrepreneur finances his business through a personal loan, the interest is high and so are EMI payments. There is a very high probability of default and cash flow problems. In such a situation, credit terms become extremely difficult for the business owner to build a reputation and a favorable loan. Should new entrepreneurs apply for a business loan to ensure credibility for their business, if nothing else?
Use of funds for personal expenditure:As it is a personal loan, it can be used by business owners for personal emergency needs. It leads to a lack of discipline and misevaluation of existing funds towards the initiative, which will not help in driving business growth. Business loans can allow entrepreneurs to bypass such problems.
Taking advantage of government schemes for business:If the company qualifies for the loan guarantee scheme of the government, the business owner will get a maximum of Rs. 1 crore. In such a case, a business loan of such a large amount at a better interest rate rises well compared to a personal loan for business. Meanwhile, a personal loan of Rs. 1 crore without collateral support would be an excellent question for anyone who is just starting their business.
If you meet the essential eligibility criteria or walk into your nearest ATM, you can get a personal loan immediately; it can best address the need for emergency business. As a practice, it is not advisable to take a personal loan to expand your business. Instead, entrepreneurs will apply for entrepreneurial venture loans!
Amount and urgency of the loan requirement:Both are essential factors that may affect the preference of business loan options over personal loans. It is more likely to get a business loan at favorable interest rates if the amount of loan required is very high, but the business has been doing well over the years.
For the urgency of the need, a personal loan can be approved more quickly than a business loan. However, if the business owner has an existing personal loan, home loan, vehicle loan, etc., the personal loan amount will be less.
Conclusion: If you are an entrepreneur who nurtures a great business and ambition to build an eternal brand, then it may make sense to apply for a business loan rather than opting for a personal loan for business growth. You can apply for the loan here https://lowinterestloanhub.com.
Businesses may require loans to manage working capital, presence and infrastructure expansion, import systems and equipment, and more. The amount needed for such loans is sufficient, and it is in the business’s interest to ensure that the cost of raising capital is feasible and affordable.
