Personal Loan Vs Business Loan: Which is Better?

If you are a businessman planning to expand your business or needing funds to buy machinery or gadgets for the business, it’s important that you understand the best way to finance your business requirements. While the business loan is the first option that comes to your mind for business financing, many entrepreneurs feel that a personal loan can be an ideal choice.

Personal loan or business loan? Which is better for financing your business requirements? Let’s get down to the basics to differentiate between the two.

Personal Loan:

A personal loan is an unsecured loan, which you can use for any purpose. It means that you don’t need to provide any kind of collateral to get the loan. If you want quick financial assistance to deal with the financial crunch without going through the hassles of massive documentation of a traditional business loan, a personal loan is the best business finance option.

Personal Loan Advantages

• Easy to apply
• No collateral needed
• Minimal documentation
• Excellent source of emergency cash

Personal Loan Disadvantages

• Interest rates are relatively higher because it’s a collateral-free loan
• The loan amount is comparatively smaller as compared to business loans
• Need a very good credit score to qualify

Business Loan

A business loan is a secured loan that has to be used for business purposes only. You can use a business loan for various business activities such as funding your startup, paying salaries, expanding your existing business infrastructure or any other business requirements that need funds. However, getting a business loan is not easy as it has stringent eligibility criteria and exhaustive documentation.

Business Loan Advantages

• You get tax benefits
• Lower interest rates
• Various options such as term business loan, standard business loan, etc. are available

Business Loan Disadvantages

• Need a robust business plan to qualify for a business loan
• Long application process
• Exhaustive documentation
• Need to provide collateral as security against the loan
• You might not be approved for the requested amount. Most banks only approve 70%-80% of your requested business loan amount.

Personal Loan Vs Business Loan

Both personal and business loans have their own pros and cons. So, how do you decide which is the better option for you? Let’s gain a bit of perspective on this matter by comparing both types of loans based on their features.

Ease of Application

The loan application and disbursal process for personal loans are relatively quick. Business loans take a lot of time to process as a lot of paperwork and due diligence is involved before approving and disbursing the loan amount.

Collateral

Personal loans are unsecured loans, which means no collateral is required. Business loans are secured loans, which means you may be asked to mortgage your office space, factories or any other asset to get the loan.

Interest Rates

Personal loans, by design, is to help meet your personal needs such as wedding, home renovation, travel, or other emergency cash needs. Since it is an unsecured loan, the interest rate is comparatively higher. The main purpose of a business loan is to help meet your financial business requirements. The interest rates are lower because it’s a secured loan where you need to pledge collateral as security.

Loan Tenure

As far as the repayment is concerned, personal loans have shorter tenures. On the other hand, business loans have comparatively longer tenures.

Eligibility Criteria

For personal loans, the lenders usually check your debt to income ratio and your credit score to approve the loan with minimal documentation. But in the case of a business loan, the lenders check your personal as well as your business credit score to assess your creditworthiness. Moreover, you may have to provide documents, including bank account and profit & loss statements, business plans, etc.

Tax Benefit

There are no tax benefits on personal loans. However, the interest paid on your business loan is tax-deductible.

The above comparison is to help you judge the best finance option when in need of financial assistance. After understanding the differences, you can decide which type of loan can cater to your business needs the best. If your financial need is small and urgent, getting a personal loan from MoneyTap is a good choice. And if your need is large and you need longer tenure to repay the loan, a business loan can be an appropriate choice. However, as a thumb rule, before applying for any type of loan, make sure you use the loan EMI calculator to get an idea of how much you’ll pay each month towards your loan. This will help you manage your finances better.