When a business owner plans for an expansion or needs funds to buy machinery or invest in marketing, it’s crucial to find the best source to finance their small business requirements. For most of them, Business Loans are the instant funding options that come to their mind. However, many entrepreneurs consider a Personal Loan a better way to fund their businesses.
As Indian NBFCs make both the loan types easily accessible and affordable, choosing the better option becomes tricky because an entrepreneur needs to consider several factors before making the final choice. So, here are detailed pros and cons of Personal Loans over Business Loans so that an aspiring borrower can make an informed decision.
What are Personal Loans and Business Loans?
Personal Loans: Personal Loans are collateral-free loans that many NBFCs, banks, and financial institutions provide to individuals who need financial assistance for any purpose. Small business owners looking for a loan for business purposes must contact lenders who offer Personal Loans to self-employed professionals. Since Personal Loans do not come with end-use restrictions, borrowers may use them for any purpose they want, be it to finance a wedding, home renovation, vacation, education, or medical emergency.
Business Loans: Business Loans refer to different financing options NBFCs and banks provide to startups or existing businesses. Some popular ones include short-term loans, equipment financing, overdraft facility, merchant advance, line of credit, working capital loans, etc. Any business, including a retailer, publicly or privately held company, partnership firm, or sole proprietor is eligible to apply for a Business Loan. However, one must utilize the amount to run a business and scale it up.
Pros of Personal Loans over Business Loans
No End-Use Restrictions: Personal Loans provide funds to borrowers to cover various expenses without any end-use restrictions. The borrower does not need to tell the lender why they need the borrowed money. However, when they take business finance, they must use it for business-related activities only as pre-agreed with the lender.
Collateral: Personal Loans are unsecured loans that one may borrow without pledging an asset as collateral. On the other hand, many types of Business Loans are secured, which one must secure with an asset, security, or guarantor. So, the borrower’s assets are not put at stake with a Personal Loan.
Eligibility Conditions: While evaluating Personal Loans, most lenders have eligibility criteria related to the applicant’s age, income, employment, financial obligations, and credit score. On the other hand, NBFCs offering Business Loans have stricter eligibility conditions regarding the applicant’s business operations, vintage, business plans, etc. As a result, Personal Loans are much easier to avail of than Business Loans.
Documentation Requirements: Most NBFCs providing Personal Loans have minimal documentation requirements, including essential documents like an Aadhaar card, PAN card, ITR, income computation, and bank statements. On the contrary, Business Loans require plenty of documents to prove ownership, GST, profit and loss, business operations, etc.
Availability: Most lenders feel safer lending loans to salaried employees with regular income. Operating a business is riskier and many lenders fear losing their money when lending to business owners. Therefore, Personal Loans are easier to avail of than Business Loans.
Cons of Personal Loans over Business Loans
Interest Rates: Unsecured Personal Loans have higher interest rates compared to secured business loans. However, one may save on the interest cost by comparing lenders, maintaining a decent credit score, and selecting shorter loan tenure.
Tax Benefits: Many types of Business Loans offer tax benefits to borrowers. However, there are no tax benefits on Personal Loans.
Repayment Tenure: Personal Loans have shorter loan tenure than Business Loans, affecting the borrower’s repayment capacity and EMI amount. Shorter tenure means bulkier EMIs, while longer tenure leads to easily manageable EMIs.
Loan Amount: Personal Loans provide a smaller loan amount than Business Loans due to their unsecured nature and higher demand.
As it is apparent, Personal and Business loans have several differences. However, with thorough research and comparison, one can understand their pros and cons and make an informed decision. Before applying for any loan type, use the eligibility and EMI calculators to calculate the loan amount and know the estimated EMI amount payable each month. After deciding between a Personal Loan and a Business Loan, compare the available lenders and apply diligently.
