Most businesses need certain financial resources in order to operate and stay afloat. Without money, a company may not thrive in a competitive market. If you are looking for the right loan for business funding, it’s very important to know what would work best for you and your company.
The need for funding is crucial to keep thing going, especially if you’ve just opened up a start – up!
Sometimes though, you may get confused when choosing between a personal loan and a business loan. While the two have some similarities, learning how they work and how they differ from each other will give you a better understanding of what’s good for your business.
What is a Personal Loan?
Simply put, a personal loan is a type of loan that is given to an individual where the money is borrowed at a fixed rate and repaid in installments. This type of loan is commonly used to make a big purchase, household repairs or to pay off credit card debt.
When approved, the amount will be received in a lump sum and the borrower is then obligated to pay back the amount plus the interest associated with it. Many small businesses use personal loans to fund or expand their activity.
ADVANTAGES
- Ease of Application
For a business loan, banks will usually need to see your detailed business plans, financial projections, and assurance that your company is able to pay back the amount. Sometimes, you can get approved for a loan in a matter of hours. Your application may be influenced by your credit score, financial situation, proof of income, and tax returns.
- Lower Costs
Lenders tend to have higher interest rates on unsecured business loans. This may cost you more and if you opt for a secured loan, you need collateral. However, if your business goes unstable (considering it’s new) and you cannot make repayment, the lender will take possession of your assets. Personal loans are often unsecured and typically come with lower costs.
- Flexibility of Use
You can use your personal loans for many purposes. You are flexible to use it for your medical bills, travel expenses, home renovations, car repair, or to make a purchase of anything you desire.
DISADVANTAGES
- High – Interest Rates
If you have a good credit rating, you can benefit from a lower rate. But if you have a poor payment history, banks interpret it as a high credit risk and chances are they will give you high – interest rates. Creditworthiness is very crucial when it comes to loan applications as your fate of being approved depends on it.
- Fixed Payments
In contrast to credit cards where you can take time to make payments, you are required to pay in the specific time for the personal loan. If you miss paying on the due date, the lender has the right to sue you for nonpayment (unsecured) or take possession of the collateral (secured).
- Lower Lending limit
Compared to business loans where you can borrow millions, the amount of money you can borrow from a personal loan depends on the limitations set by the credit union, lender, or banks. Therefore, if the amount is not sufficient to cover up your expenses, you might consider applying for multiple personal loans from different lenders.
What is a Business Loan?
When companies can’t meet their financial needs to support their workforce, business operations, and expenses, they usually apply for a business loan. The capital given by lenders can be used by business to fund their inventory, office supplies, and other projects while small businesses utilize it to pay for salaries and wages for their employees. With a business loan, you are required to repay your debt according to the agreed terms and conditions set by both parties.
ADVANTAGES
- Higher Lending Limit
The amount of capital you can borrow from a business loan is usually higher than personal loan offers. You can eventually borrow more funding if your income statement and collateral is impressive enough to build trust with the lender.
- Offers more Value
With business loans, filing your taxes becomes easier because the penalties, fees, and interests acquired from the money you borrowed for business operations are deducted from it. It is also advisable to separate your business finances from personal finances to keep track of the money you are spending.
DISADVANTAGES
- Difficult for Start – ups
If you are just starting your business, you’ll be having a hard time to obtain a business loan. Banks and financial institutions would be interested to see the revenue your business generates and if the company has the capacity to make repayments. For newly – launched businesses, this can be a painful struggle.
- Longer time of Approval
Personal loans can be released in hours or within the day while business loans may take months to get approved. As a business owner, you need to provide all the necessary requirements such as a copy of your business plan, financial statement and projections, company overview, and even the profile of your management team. In most cases, to qualify for a business loan, your company must be incorporated.
A personal loan is a better choice when…
- You have an excellent credit score
As said earlier, interest rates are associated with your credit score. The higher your credit score, the lower the interest and vice versa. While personal loans don’t require collateral, take into consideration that you will be risking your personal credit score. If you can repay on time, this would not be a problem.
- You are a Start – up
New businesses may not have enough revenue history to show to lenders. Even you pursue to apply for a business loan and get approved, you will be paying higher interest rates. They will also ask for collateral which may put your assets at risk, while a personal loan doesn’t require one.
Final Thoughts
Both personal and business loans are helpful for your business. As a business owner, your loan application will likely be influenced by your needs and the time you need to cover them. Before you make a move, take time to evaluate your financial situation and the growth opportunities for your business.
