A small business requires 3 key elements for smooth operations: a good idea, customers who want to use your products or services, and smooth cash flow. A disruption in any of these elements can have a significant negative impact on your business. A personal loan can be one option for funding your business and resolving cash flow issues, especially if you do not yet qualify for a business loan or do not want or have enough assets to pledge.

Let us go over the benefits and risks of a personal loan for small businesses, as well as when you should consider getting one as a small business owner. 

Overview of Personal Loans for Small Businesses in India

Financing a business through a personal loan is a popular option among small business owners in India due to its simple process and versatility. While a business loan requires a large amount of paperwork and collateral, a personal loan — an unsecured type of credit — can be obtained with little documentation and no collateral. 

Lenders consider your creditworthiness by evaluating your financial history, age, credit score, and other factors while approving your loan. In general, individuals with higher credit scores are more likely to be approved for a personal loan with better loan terms and interest rates. Conversely, applicants with lower CIBIL scores might find it more difficult to get approved for a personal loan or might be granted one at a higher interest rate. 

What Are The Differences Between A Personal Loan And A Business Loan? 

When it comes to business expenses, borrowing money is a decision that requires careful thought. You may need or want a loan for a variety of reasons, and there are numerous lenders to pick from and lending options to evaluate. When deciding between a small business loan or a personal loan for business, some factors to consider are as follows:

The Benefits Of Availing Personal Loans For Small Businesses

When compared to other financing options, taking out a personal loan for your business can provide several benefits. This includes: 

Flexible End Usage

There are not many limitations on how you can use the money you borrow from a personal loan. They can be used for a variety of purposes, including debt consolidation, home repair, and business expenses. 

Qualification Ease

If you own a small business, obtaining a business loan can be difficult, while qualifying for a personal loan may be easier. Banks offer personal loans based on your creditworthiness. However, when you apply for a business loan, you will be asked for a lot of information, such as your length of time in business, monthly and annual profits, and your personal and business credit scores. Your chances of qualifying increase with the length of time your business has been in operation and the likelihood that you have a track record of revenue and profit.

No Collateral Requirement

As we have already seen, personal loans are an unsecured form of credit, which means that no collateral is needed to be approved for one. This makes it extremely beneficial for small business owners who do not have significant assets to pledge or who do not want to risk their assets. 

Faster Access to Funds

The time required to obtain funding and approval for a personal loan differs depending on the lender. In general, online lenders operate more quickly than conventional banks and credit unions. On the other hand, because business loans require a lot of paperwork, the process can be considerably slower. 

Potentially Low Interest Rates

Personal loans may have lower annual percentage rates (APRs) than other financing options, like credit cards if your credit is good. 

The Risks of Using Personal Loans for Small Business

For small business owners who might have trouble securing business-specific loans, personal loans are frequently viewed as an expedient way to finance their operations. Even though personal loans can be useful in certain situations, there are significant risks involved. 

Personal Liability for Business Debt

While business loans can be secured by company assets, personal loans put your own money and assets at risk. You are responsible for paying back the debt if you use a personal loan for your business. Having said that, if your company does not generate enough revenue to cover the EMIs, you will be required to repay the loan yourself. If your business faces financial difficulties, it may put a strain on your savings or even jeopardise your family’s financial stability.

Impact on Personal Credit Score

If you avail of a personal loan for your business and fail to make monthly payments, your credit score is at risk. Missed payments can lower your credit score, making it difficult to access loans in the future. 

Limited Loan Amount

Personal loans may not offer as much capital as traditional business loans. If you need significant funds—perhaps to expand your operations or purchase a large amount of inventory—a personal loan might not provide enough. 

Higher Interest Rates Compared to Secured Loans

One of the drawbacks of using personal loans for business is the higher interest rates. Personal loans are often unsecured, which means lenders charge higher interest to cover their risk. Compared to secured business loans, personal loans may lead to higher overall costs. 

When Should Small Business Owners Consider a Personal Loan?

Here are some specific situations where taking out a personal loan may be a better option for your business: 

When You Need Only a Small Amount

Many banks are hesitant to lend large amounts of business loans to start-ups and small businesses. Although establishing a small business loan is much less expensive for banks, it is frequently the same as establishing much larger loans. On the other hand, personal loans are frequently much simpler to obtain and do not require the same kind of business analysis before approval.

When You Have Short-term Requirements 

A personal loan can be a quick and efficient solution if you need money right away, for instance, to pay for a one-time incident or to bridge a temporary cash-flow gap. Personal loans are often easier and faster to obtain than traditional business loans, allowing you to get the money you need right away.

When You Lack An Asset

Unlike secured business loans, you do not need any collateral to obtain a personal loan. This makes personal loans a feasible option for small business owners who lack significant assets to pledge as collateral. 

When You Are Not Eligible for Business Loans 

Sometimes, your business may not meet the requirements for traditional business loans, especially if it’s new or lacks sufficient credit history. In this case, a personal loan could offer a lifeline. This way, you can still secure funding without waiting to establish the credit or collateral that traditional business loans may require.

How to Get Personal Loans for Small Businesses Easily

As a business owner, you know how important it is to secure the necessary funds at the right time. That’s where Kreditbazar comes in—making it easier for you to access personal loans that fit your unique needs.

At Kreditbazar, we’ve partnered with top-leading NBFCs, ensuring you access a wide range of financial services without the typical hurdles. Our in-house, highly qualified professionals are dedicated to understanding your financial needs through exceptional financial consultation to provide you with tailored financial solutions. 

You don’t have to worry about meeting rigid requirements or dealing with extensive paperwork. With Kreditbazar’s simplified digital portal, the process is simple and quick, so you can get the funds you need without delays. Whether it’s for working capital, equipment purchases, or urgent expenses, we’ll help you find the right loan to keep your business moving forward.

We understand that every business operates differently, and your cash flow might vary from month to month. To ensure that you choose a loan tenure that works best for you and that you can easily manage the repayment without interfering with your business operations, we, along with our NBFC partners, offer flexible loan repayment terms of up to 72 months. Whether you need a short-term loan or a longer repayment period, we offer you the flexibility to stay in control of your finances while focusing on growing your business. 

Conclusion

When used carefully, personal loans can be a useful tool for small business owners. They provide advantages like no collateral requirements, flexibility, and fast access to funds. However, they are associated with risks such as personal liability, limited loan amounts, and potentially higher interest rates. As a small business owner, you must carefully consider the benefits and drawbacks of a personal loan and determine whether it is appropriate for your company’s needs and financial capabilities.

At Kreditbazar, we are committed to supporting small business owners like you by offering reliable personal loan options through our partnerships with trusted NBFCs. We assist you in making responsible borrowing decisions that propel your business forward by offering flexible repayment terms, streamlined processes, and personalised financial consultation.

Reach out to Kreditbazar today and take the next step toward achieving your business goals!