With the push on lending, financing your business has become even easier. Business loans, credit facilities, and investor funding are some of the common ways to get your hands on additional capital for your enterprise. These additional sources may be required for a variety of reasons, from business expansion to capital expenditure. Whatever be your reason, there are two popular ways to seek additional finance, one is a business loan and the other is a personal loan.
This article can help you decide which of the two is suitable for you. But before that, let’s look at the features of each of these loan types.
Personal Loan
Personal loans are one of the simplest ways to secure collateral-free finance. As the name suggests, these loans can be used for personal reasons and do not have any limitations on the end-usage. But since these loans are associated with a specific individual, the liability rests on the borrower. Thus, even if you end up availing a personal loan to finance your business requirements, the liability shall rest on you for its repayment and not your organisation. Easy approval, speedy disbursement, no requirement for collateral are some of the reasons that make personal loans a preference among the buyers.
Small Business Loan
As compared to a personal loan, small business loans have certain restrictions on their end use. The title of the loan suggests that it can be specifically applied for the objectives of the business, which include capital expenditure, labour expansion, marketing activities, and other similar expenses. These small business loans should be capable of contributing to the revenue-generating activities of the business. An effective way to pay off the business loans shall be ensuring the additional revenue offsets the cost of these loans. In some instances, lenders also allow you to avail small business loans to refinance your business-related debts.
With a small business loan, the personal and business-related borrowings can be separated for the owners of the business. Moreover, the liabilities can be restricted based on the legal status of your enterprise. For instance, a business loan in a limited liability partnership can be restricted to only the share of what the partner is due from the business. Further, a business loan can help your organisation build its standing in the industry for any borrowings required. It also costs far lower than a personal loan and, thus, must be preferred.
Is it allowed to use business loans for personal use and vice versa?
A business loan’s use is restricted for organisational activities and, thus, cannot be used for personal purposes. On the other hand, a personal loan can be used to fund the activities of your business. However, as discussed above, you need to keep in mind that you, the borrower, are liable for the repayment of this personal loan and not the business organisation.
Which of the two is right for you?
The right type of loan depends on the type of business you own. For established business organisations, availing a business loan is convenient because of its affordable interest rates. In addition, an established business will have good credit history that can assure the lenders of its repayment capability. Also, there are certain documentation formalities and collateral requirements that are available for a stable and existing business organisation.
In case of new established organisations or start-ups, there is not much known about the business or is there data available on its credibility. Thus, financial institutions can be wary of lending money to these establishments. At such times, obtaining a personal loan can be the best way to secure necessary funding to meet your business objectives.
Also, businesses that do not enjoy a good credit standing can rely on personal loans for funding.
Considering the above advantages and the benefits of each type of loan, one can decide what type of finance can be sought. Make sure you do not account interest costs as the only factor in the decision-making process, but also other features that work for you.
