When you are running a business, there are times when you need extra cash to rejuvenate or re-energize your business. You may find yourself in a problem between personal and business loans. Understanding which loan suits your specific needs can make a significant difference in your financial health and your business growth.
Personal loans allow you to obtain funding without requiring a business financial history, whereas business loans have their benefits and options. In this comprehensive guide, we will look at the key differences, benefits, and drawbacks of personal loans and business loans to help you make the best decision for your business.
What Is A Personal Loan?
A personal loan is a financial tool provided by financial institutions such as banks, NBFCs, and credit unions that allows individuals to obtain lump sum credit for a variety of personal purposes.
Unlike a home loan, a car loan, or a mortgage loan, a personal loan has no predetermined purpose of use, allowing for maximum flexibility in the use of funds. Personal loans can be used for debt consolidation, covering unexpected personal expenses, home renovations, funding your dream wedding, pursuing higher education, or funding your business.
Personal loans are an unsecured type of credit, meaning you do not have to provide any collateral such as a house, car, or gold as security. The lender will pre-specify the repayment terms and once approved, a lump sum amount will be disbursed into your account.
The lenders have their eligibility criteria set to approve the personal loan including your income, credit history, age, and other factors. Even though each lender will have their own set of eligibility criteria, let us go over some common ones that will help you understand where you stand.
Eligibility Criteria For A Personal Loan
Various factors come into play when the lender is looking at the personal loan application. Because a personal loan is an unsecured type of credit, the only factors that can determine the lender’s level of trust and confidence are your age, income, credit score, job stability, etc., which reflect your repayment capabilities. Most lenders typically set the following personal loan eligibility criteria for salaried and self-employed applicants.
For Salaried:
- Minimum Age: 18 Years
- Minimum Income: Rs. 15,000 Per Month
- Minimum Job Stability: 1 Year
- Preferred CIBIL Score: 650 and above
For Self-Employed:
- Minimum Age: 21 Years
- Minimum Business Stability: 1 Year
- Income Tax Return: Minimum of 1 Year
- Preferred CIBIL Score: 650 and above
What Is A Business Loan?
A business loan is a financial tool designed specifically for businesses as a means of providing capital. A business loan can be used for a variety of purposes, including operational needs, business expansion, the opening of a new location, and many others.
Business loans have terms and conditions that are tailored specifically to the needs of the business. The primary difference between a personal loan and a business loan is that the latter can be unsecured or secured and it requires collateral for loan security, which is typically business assets or property.
During the business loan approval process, lenders examine the company’s financial situation, including revenue and outstanding debts. If you are applying for a business loan, you may also be required to describe how you intend to use the funds.
Business loan repayment terms can be both long and short; some business loans must be paid off within a year, while others take several years. The interest rate is typically determined by current market rates, the loan amount, and the borrower’s creditworthiness.
Eligibility Criteria for a Business Loan
Business loan eligibility criteria, like those for personal loans, differ between lenders. Here are some common criteria:
- Age Limit: Minimum 21 years
- Business Tenure: Minimum 1 Year
- Annual Turnover: shall be defined by Bank/NBFC
- Credit score: 650 or above
Please note that every lender has their eligibility criteria. Before applying for a business loan, make sure you understand the eligibility criteria from the lenders. This will make it easier to choose the lender that best matches your business’s profile.
Key Differences Between Personal Loans and Business Loans
While loans are widely available, it is critical to understand the differences between personal loans and business loans to determine which is best for your needs. Here are some key differences to understand between personal loans and business loans:
| Points of Difference | Personal Loans | Business Loans |
| Purpose | Personal loans can be used to cover a variety of personal expenses, including debt consolidation, unexpected expenses, higher education, weddings, home renovations, and even business funding. | Business loans are designed with business growth in mind, providing customized solutions for a variety of business activities. |
| Collateral | Personal loans are an unsecured type of credit, which means no collateral is required. | Business loans, especially for larger amounts, often require collateral such as property, equipment, or other business assets. |
| Loan Amount | Loan amounts are usually lower. | Higher amounts are usually granted. |
| Borrowers | Anyone with good financial health | Businessmen or entrepreneurs |
| Application Process | Personal loan applications are typically simpler and faster to complete, with minimal documentation required. | Business loans are a more complex process that requires a thorough review of your company’s financials, credit history, and, in some cases, a business plan. |
Advantages and Disadvantages of Personal and Business Loans
Understanding the advantages and disadvantages of personal and business loans will help you gain a better understanding of the differences and make more sound decisions.
Let us first understand the advantages and disadvantages of a personal loan:
Advantages of a Personal Loan
- One of the most significant advantages of a personal loan is its flexibility. It can be used for any purpose – either personal or business.
- The process of applying for a personal loan is very simple. It typically requires just basic documentation, such as identity proof, income proof, address, and a credit score.
- Since personal loans are unsecured, you don’t need to worry about pledging any assets to get the loan.
- Personal loans are usually disbursed quickly, often within a few days, making them ideal for urgent financial needs.
- Successfully repaying a personal loan allows you to build a good credit history, which will help you get better interest rates in the future.
Disadvantages of a Personal Loan
- Personal loans usually come with higher interest rates compared to business loans. This can increase your overall cost of borrowing.
- Personal loans offer lower amounts, which might not be sufficient for larger business needs.
- If you use a personal loan for business purposes and the business struggles to repay, your credit score could be negatively impacted.
- Due to the convenience of personal loans, people frequently overborrow.
The advantages and disadvantages of a business loan are listed below.
Advantages of a Business Loan
- Business loans provide larger amounts, which can be crucial for significant business investments like expansion or purchasing expensive equipment.
- Business loans often come with specialized products tailored to specific needs, such as working capital loans, equipment financing, or invoice financing.
- The interest paid on business loans may be tax-deductible, providing potential savings under certain conditions.
- Business loans usually offer structured repayment plans that can be aligned with your business’s cash flow, making it easier to manage repayments.
Disadvantages of a Business Loan
- Applying for a business loan can be time-consuming, involving a detailed review of your business’s financial health and plans.
- Many business loans require collateral, which can be a barrier if you don’t have assets to pledge.
- The eligibility criteria for business loans are stricter, often requiring a good business credit score and detailed financial documentation.
Personal Loan vs Business Loan: Which Should You Choose?
Every business is unique. To determine which option is best for you, you must first consider your specific funding requirements, including how quickly you require the money and the loan you qualify for based on the eligibility criteria. To help you decide, let us look at some circumstances in which you can choose between a personal loan and a business loan.
When to Choose a Personal Loan
- Personal loans are ideal for financing short-term needs such as short-term business activities or emergency funds.
- If your credit is better than your business credit, obtaining a personal loan may result in a lower interest rate or loan terms.
- When you have just started your business and are not eligible for a business loan.
- If you don’t have assets to pledge, a personal loan is a better option since it’s usually unsecured.
- When you need quick access to funds with minimal documentation, a personal loan is the way to go.
When to Choose a Business Loan
- If you’re planning a significant business investment, like expansion or purchasing equipment, a business loan is more suitable.
- Once you have established your business credit history and your company meets the eligibility requirements for a business loan, you can take advantage of lower interest rates, larger loan amounts, and longer repayment terms.
- When you require a loan product tailored to specific business needs, such as working capital or inventory financing, a business loan is the best choice.
- When you do not want to burden your personal responsibilities or credit history with your company’s financial needs.
Common Mistakes to Avoid When Selecting a Business or Personal Loan for Your Business
Here are some common mistakes to avoid when choosing a business or personal loan.
Not Assessing Your True Financial Needs
Before deciding on a loan for your business, you must accurately assess your financial requirements. Taking a loan without having a clear understanding can lead to unnecessary debt. If you carefully assess your loan requirements and understand when and why you need the money, you will be able to choose the best type of loan for your business.
Not understanding the terms and conditions.
Before deciding on the type of loan you will take out, you must understand the terms and conditions associated with personal and business loans. This will allow you to better understand the benefits and drawbacks of each, ultimately allowing you to make a sound decision.
Overlooking Total Loan Costs
Always consider the loan’s total cost, which includes interest rates, processing fees, and any other charges. Underestimating these costs can put a strain on your finances.
Ignoring Eligibility Requirements
Before applying for a loan, ensure that you meet all of the eligibility requirements. Ignoring these can result in rejection and have an impact on your credit score.
Personal Loans vs Business Loans: Tips for Making the Right Choice
When choosing between a business loan and a personal loan, here are some bonus expert tips that can help you make the right choice.
Conduct Extensive Research
Before jumping into any loan, take the time to compare offers from various lenders. Consider interest rates, loan terms, processing fees, and any additional fees, such as late payment penalties, preclosure charges, etc. Different lenders may offer vastly different terms for the same loan type, and selecting the right lender can save you a lot of money.
Understand Immediate Implications
It is easy to focus on immediate financial needs when choosing a loan, but it is also important to think about the long-term consequences. Whether you choose a personal loan or a business loan, you must consider how the loan will affect both your short-term cash flow and long-term financial well-being.
Prioritize Loan Repayment Plans
Before deciding on a loan, carefully review the repayment terms offered by the lender. While personal loans usually have fixed monthly payments that may not be as flexible, business loans frequently offer more flexible repayment schedules that can match your business’s cash flow.
Consulting a Financial Advisor
Give your business an expert touch. A financial advisor can help you understand the pros and cons of each loan option and guide you in selecting the best loan for your business needs while also matching your profile.
Through some of the brightest minds in the business, Kreditbazar provides excellent financial services and consultation for individualized guidance. Kreditbazar’s team of experts works with you to understand your goals and specific financial needs, recommending loan options that best align with your objectives. At Kreditbazar, we have partnered with multiple NBFCs, ensuring you have access to the most competitive loan offers in the market that exactly match your profile.
Conclusion
Choosing the right option for funding your business needs can be tricky. Personal and business loans both provide financing for individuals and assist them in achieving their goals. While business loans are typically intended for business owners and entrepreneurs, personal loans can be used for any purpose. Knowing the key differences, advantages, and disadvantages of personal loans vs business loans, as well as avoiding common mistakes, will allow you to make an informed decision that aligns with your goals and aspirations.
If you are still unsure, consider seeking advice from experts such as Kreditbazar to help you find the best loan option for your financial needs and achieve your objectives. Whether you are looking for a personal or business loan, making the right decision can put your company on the path to success.
Frequently Asked Questions
Q1. Which is better, a personal loan or a business loan?
Ans1. A business loan is generally better for business purposes as it comes with tailored benefits such as lower interest rates, higher loan amounts, and tax advantages. Personal loans are more flexible but typically have higher interest rates.
Q2. Which loan is cheaper: personal or business?
Ans2. Business loans are usually cheaper than personal loans because they have lower interest rates and longer repayment tenures. Personal loans often have higher interest rates as they are unsecured.
Q3. What are the disadvantages of a business loan?
Ans3. The disadvantages of a business loan include a lengthy approval process, the requirement for collateral, stringent documentation, and strict repayment terms that could strain cash flow if the business underperforms.
Q4. Which loan is best for business?
Ans4. The best loans for business include Mudra loans, SIDBI loans, and business loans from banks and NBFCs, depending on the size and nature of the business. These loans come with lower interest rates and flexible terms.
Q5. What are the disadvantages of a personal loan?
Ans5. Disadvantages of personal loans include higher interest rates, shorter repayment periods, and limited tax benefits. Additionally, using personal loans for business may affect personal credit if the business fails to generate revenue.
Q6. Which loan is best to start a business?
Ans6. Mudra loans and start-up loans from government schemes like Stand-Up India or business loans from banks and NBFCs are considered the best for starting a business as they provide higher loan amounts with favourable terms.
Q7. What is the eligibility for a business loan?
Ans7. Eligibility for a business loan typically includes a business vintage of at least 2-3 years, a minimum turnover requirement, a good credit history, and stable revenue. Some lenders may also require collateral.
Q8. Which loan is easier to get?
Ans8. Personal loans are easier to get compared to business loans, as they require less documentation, and no collateral, and approval is quicker. Business loans often involve more stringent criteria and longer processing times.
Q9. Which type of loan is the cheapest?
Ans9. Secured loans, such as loans against property or gold loans, are the cheapest as they offer lower interest rates. Among business and personal loans, business loans are generally more affordable.
Q10. Is taking a loan for business good or bad?
Ans10. Taking a loan for a business can be good if the borrowed funds are used for growth and expansion, as business loans offer tax benefits and better interest rates. However, improper management of funds can lead to financial strain.
Q11. Does a business loan save tax?
Ans11. Yes, business loans can save tax as the interest paid on the loan is tax-deductible as a business expense under Indian tax laws. However, the principal repayment is not eligible for tax deductions.
Q12. Do business loans hurt your credit?
Ans12. Business loans can hurt your credit if you fail to repay on time. Timely repayments can improve your credit score, while defaults or delays may negatively impact both your business and personal credit scores.
Q13. Which bank is good for a business loan?
Ans13. HDFC Bank, ICICI Bank, SBI, and Axis Bank are considered good options for business loans in India, offering competitive interest rates, flexible repayment options, and a variety of loan products for businesses.
Q14. What is the 2 crore loan by the government?
Ans14. The ₹2 crore loan refers to the Stand-Up India scheme, which offers loans ranging from ₹10 lakh to ₹2 crore to support women and SC/ST entrepreneurs in starting their businesses.
Q15. What is the difference between a personal loan and a business loan?
Ans15. A personal loan is typically unsecured and used for personal or emergency expenses, while a business loan is meant for business purposes, often secured with lower interest rates, and includes tax benefits.
Q16. Which loan is better for business?
Ans16. A business loan is better suited for business purposes due to its tailored benefits, including lower interest rates, longer repayment terms, and larger loan amounts, which help meet the needs of growing businesses.
Q17. What are the disadvantages of personal loans?
Ans17. Disadvantages of personal loans include higher interest rates, shorter repayment tenures, and fewer tax benefits. Additionally, personal loans used for business purposes could hurt personal credit if the business does not generate sufficient income.
Q18. Can we do business with a personal loan?
Ans18. Yes, a personal loan can be used for business, but it may not be the best option as personal loans usually have higher interest rates and shorter repayment periods. Business loans offer better terms and tax benefits.
Q19. What is the minimum annual income for a business loan?
Ans19. The minimum annual income required for a business loan varies by lender but typically ranges from ₹1.5 lakh to ₹3 lakh for small businesses. Some lenders may also require a stable revenue stream for the past 2-3 years.
Q20. What is the maximum amount of a business loan?
Ans20. The maximum amount of a business loan depends on the lender and the borrower’s eligibility. In India, business loans can go up to ₹10 crore or more, depending on the size and needs of the business.
Q21. Does HDFC provide a business loan?
Ans21. Yes, HDFC Bank provides business loans with competitive interest rates, flexible repayment options, and minimal documentation. They cater to SMEs, traders, and service providers across industries.
Q22. How much ITR is required for a business loan?
Ans22. Typically, lenders require at least 2-3 years of ITR (Income Tax Return) filings to process a business loan application. The amount of ITR required depends on the lender’s policy and the loan amount.
Q23. Can I get a business loan without income proof?
Ans23. It is challenging to get a business loan without income proof, but some lenders may approve loans based on collateral or alternative documentation like bank statements and a strong business plan.
Q24. Who is eligible for a small business loan?
Ans24. Small business loan eligibility includes having a minimum business vintage of 2-3 years, a stable revenue stream, and a good credit history. Some schemes like Mudra loans may have specific requirements for micro and small enterprises.
Q25. Which type of loan does not need income proof?
Ans25. Loans like secured loans (e.g., loans against property, gold loans) may not require income proof, as the collateral mitigates the risk for lenders. Some lenders may also offer small personal loans based on your credit score.
Q26. Is ITR compulsory for personal loans?
Ans26. For salaried individuals, ITR may not be compulsory for a personal loan as salary slips and bank statements are usually sufficient. However, self-employed individuals typically need ITR to prove their income.
Q27. Can I get a loan without GST?
Ans27. Yes, you can get a loan without GST registration, especially for personal loans or smaller business loans. However, having GST registration can improve your chances of getting larger business loans.
Q28. Who is eligible for a Mudra loan?
Ans28. Individuals, small business owners, and MSMEs in the non-farm sector are eligible for Mudra loans. There are three categories: Shishu (up to ₹50,000), Kishor (₹50,000 to ₹5 lakh), and Tarun (₹5 lakh to ₹10 lakh).
