4 Ways a Business Loan Differs from a Personal Loan

Have you heard about financial products – a personal loan and a business loan? Wondering what makes the former different from the latter? Can these be used interchangeably? How should you apply for these, and in which scenarios the loans can be utilized? Basically, a personal loan does not require collateral, but a company loan can be offered either with or without collateral. The former is used for any financial emergency or monetary need, while the latter is usually taken for a business purpose.

To get a better idea about a personal loan and a business loan, along with the difference between the both, we have elucidated a few pointers below.

1. End Purpose of Funds

When you apply for a personal loan, the financial institution wants to see proof of your income in order to assess your repayment capacity. It will also check for your existing financial liabilities and personal credit score – is it good or bad. The lender may not always want to know the end purpose of the loan, as the funds can be utilized for any purpose, other than that for any illegal or illicit activity.

But, when it comes to a business loan, the financial institution wants to ensure the funds are being used for business purposes alone. The funds are usually taken to expand the establishment, purchase equipment, arrange working capital, money for a project, etc. Thus, the lender may ask for additional information on how you wish to utilize the provided amount.

2. Loan Amount and Tenure

One of the major differences between a business loan and a personal loan is the extent for quantum of finance. Usually, personal loans are of a smaller amount, as they are unsecured in nature. A business loan, especially the one secured in nature, tends to be of a higher amount. A secured loan is where you have to pledge collateral. So that in case of a loan default, the lender is able to recover the outstanding due.

But, an unsecured business loan could be up to an equal amount of a personal loan – Rs. 1 lakh to Rs. 1 crore. If you are an entrepreneur, and need a certain amount of money for your company, it is more beneficial to apply for a business loan than any other type of unsecured loan. The tenure of the loans is usually up to 5 years, starting from a year and in some cases 6 months.

Remember, when selecting a loan amount; borrow only what you should, as the cost of the loan depends on the quantum of finance. Lower the loan amount, lower will be the total cost of the loan, and vice-versa. Similarly, when selecting tenure, choose the shortest one possible as per your repayment capacity. Shorter tenures assure lower interest payout, and vice-versa.

3. Documents Required for Loan Application

Before you apply for any of these loans, you must understand the difference in documentation. For a personal loan, the lender will normally require your income proof, identity proof, residence proof, recent bank statement and salary slip, employment proof, etc. To apply for this loan, you are expected to draw at least Rs. 25,000 as monthly salary with 2 years work experience. Stability of income and job are essential.

For a business loan, the documentation include cash-flow reports, profit and loss statements, credit history of the company, analysis proof of industry and the business, residence proof and identity proof of the applicants, and many other documents as asked by the lender. Make sure all the documents are up-to-date and audited, especially the ones related to company financials.

Remember to provide accurate documents with the loan application so that the fund request can be processed as quickly as possible. In case of faulty documents, the application can be disapproved, or it can take longer for the process, as you may have to reapply for the loan. Carry the original documents along with their copies if applying offline, and if applying online, you have to upload the soft-copy of the documents.

4. Time Taken to Process and Disburse the Loan

A certain time is taken to process the loan application and disburse the money. In case of a personal loan, the application is processed quickly, as most of the financial institutions take instant lending decisions. It may take typically a day or two to approve the loan application, and disburse the money to your bank account. But, when it is about a business loan application, the time consumed to process the application could be greater as usually larger borrowing amount is involved, and the documents have to be scrutinized in detail.

Some of the lenders may also provide wealth management guidance to entrepreneurs about how to utilize the funds so that the repayment schedule does not get disrupted, and you are able to make the most of the provided funds. It can take up to 72 hours or more for approving the loan application and disbursing the funds.

Another point to consider is that in a personal loan, the financial institution may not enquire about utilization of funds, until the circumstances ask for it, but in a business loan, the lender can request for regular updates on the company’s financial health. This is done to keep a check if your repayment capacity is strong throughout the tenure of the loan.

To Conclude

Thus, both personal loans and business loans are different from each other in many ways. A personal loan is usually provided to salaried individuals, but in a few cases, it can be offered to professionals such as Chartered Accountants, consultants, lawyers, doctors, etc. If you wish to establish a start-up, a personal loan can help, as a traditional business loan is provided to companies that have at least 3 years of vintage, a proven track-record of financials, and credit history.

So, when choosing between both the loans, understand the purpose for which you need funds, also analyze the amount you require, along with a clear idea about your repayment capacity. These details will help you select the ideal loan option.

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