Personal Loan vs Business Loan
With credit becoming easily accessible and being considered a legitimate way to grow businesses, it gets perplexing for people to choose from the various loan products offered by Banks and NBFCs. There exists a plethora of loan products, each with its pros and cons.
We shall try to differentiate between business loans and personal loans while putting forth key features of both of them to help you choose the right product.
Key Differences Between Personal Loan vs Business Loan
| Aspects | Personal Loan | Business Loan |
| Loan Amount | Up to INR. 40 lakh | Up to INR. 2 crore |
| Interest Rate | Starts from 10.25% | Starts from 16% |
| Repayment Tenure | 1 to 5 years | Up to 10 years. |
| Collateral Requirement | Unsecured | Mostly unsecured, some loans may require collateral like plant, machinery, or raw material. |
| Eligibility | Self-employed individuals | Retailers, Traders, Manufacturers, SMEs, MSMEs, Partnership Firms, Private Limited Companies, Closely held Limited Companies. |
| Documents Required | ID Proof, Address Proof, Business Proof and Income Proof. | ID Proof, Address Proof, Business address proof, Proof of business existence, Bank statement, Income Tax Return (ITR), Balance sheet and Profit and Loss account statement, Financial documents audited/attested/signed by Certified CA, Sales Tax Certificate, Copy of trade license, Certified copy of partnership deed, GST registration Certificate. |
What is a Personal Loan?
A personal loan is an unsecured loan that provides individuals with flexible use of funds, catering to both personal and business needs. For business purposes, individuals can avail themselves of up to INR 40 lakh to manage various financial aspects of their business.
Advantages and Disadvantages of Personal Loans
Here are some of the advantages and disadvantages of personal loans;
Advantages:
- Flexibility: Personal loans offer flexibility in fund utilisation, allowing borrowers to use the funds for various purposes.
- Quick Processing: They are processed and approved quickly, making them suitable for urgent cash needs.
- No Collateral: Personal loans are generally unsecured, so borrowers don’t have to risk losing assets if they fail to repay.
- Fixed Repayment Terms: They come with fixed repayment terms, making financial planning and budgeting easier.
- Credit Building: Successful repayment can help build a good credit history, leading to better future interest rates.
Disadvantages:
- High-Interest Rates: Unsecured nature often results in higher interest rates.
- Limited Loan Amounts: They typically offer smaller loan amounts, limiting borrowing capacity.
- Strict Eligibility: Borrowers need to meet various criteria, such as income stability and good credit history.
- Risk of Overborrowing: Convenience can lead to over-borrowing and financial strain.
Also Read the Difference Between Secured and Unsecured Loan
What is a Business Loan?
A business loan is a type of financing specifically designed to meet the financial needs of businesses. It provides capital for various business purposes such as expansion, inventory purchase, equipment acquisition, and operational expenses. Business loans typically offer larger loan amounts compared to personal loans, making them ideal for financing significant business projects.
Advantages and Disadvantages of Business Loans
Here are some of the advantages and disadvantages of a business loan;
Advantages:
- Capital Provision: Business loans provide capital for business growth, including expansions, hiring, inventory, and new services/products.
- Flexibility in Fund Use: They offer flexibility in utilising funds for various business purposes.
- Longer Repayment Terms: Business loans come with longer repayment terms, reducing financial stress.
- Tax Deductible Interest: Interest paid on business loans is often tax-deductible, providing potential tax benefits.
Disadvantages:
- Collateral Requirement: Secured loans require collateral, risking business assets.
- Strict Eligibility: Business loans often have strict eligibility criteria.
- Personal Guarantees: Business owners may need to provide personal guarantees for loans.
- Higher Interest Rates: Business loans usually come with higher interest rates due to increased financing risk.
Which one should you go for? A business loan or a personal loan?
The final decision to determine whether one should go for a business loan or a personal loan is contingent upon the activity or expenditure they need the loan for. While personal loans are easy to apply for and require less documentation, the amount which can be sanctioned against personal loans is often limited and inadequate for business activities.
Apart from having shorter tenure, they require that a person must have a very good credit score.
In case you require a loan for emergency funding and have a good credit score, you could opt for a personal loan.
However, if you require loans for business activities or expansion, a business loan remains the apposite product. While an unsecured business loan could be availed without pledging an asset, a loan against collateral would not only bring your interest rates down but also grant you a longer tenure for repayment and an option for restructuring in the future. Moreover, the interest paid on a business loan is tax deductible.
Suggested Read: Best 25+ Low Credit Score loan App List
FAQs
Can personal loan be used as business loan?
Yes, you can use a personal loan as a business loan. It’s the choice of the borrower that they are comfortable with.
Can we get a business loan on salary?
No, since a business loan is always taken by a company, a person cannot get a business loan on salary. However, a person can take an unsecured personal loan against their salary for business activities.
What is an ideal credit score for a personal loan?
A CIBIL score above 700 is considered desirable for personal loans.
What’s the late fee on business loan interest payment?
Usually, Banks/NBFCs charge a penalty ranging from 1-5% on late payments.
Can we get a personal loan if you have a business?
Yes, you can get a personal loan irrespective of whether you have a business or not.
Which loan is most suitable for businesses?
According to their unique demands, businesses should choose business-specific loans such as business loans, start-up loans, company loans, equipment finance, etc.
Why are commercial loans less expensive than consumer loans?
This is because the assets of the relevant company, the government, or a regulatory authority protect them.
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