There’s no single answer. It all depends on where you are in your business, the loan options available to you and how quickly you need the funds. Read on to analyse the pros and cons of a personal loan for business and make an informed decision.
Finding the right financing for a small business can be challenging. Most business loans require a solid business history of at least two years with stellar profit records. So, how do you get the required financing to get your business idea off the ground or if you’re just starting out?
This is why most business owners lean towards a personal loan to meet their business needs. After all, qualifying for a personal loan is easy, and the funds are available quickly. The all-important question here is – while you can take a personal loan for business, should you do it?
Read on to find the pros and cons of using a personal loan for business and more.
The most significant advantage of a personal loan is that there is no restriction on the way you can use the funds. It’s totally up to your discretion. You can use the capital you receive to meet various personal needs like marriage expenses, home renovation, travel, or even shopping. Since there is no restriction on the end usage of the funds, you can also use them to meet your various business needs.
Qualifying for a personal loan is also quite simple. It depends on your credit score and history, and personal finances. A good credit score of 700+ can make it easy to qualify for personal loans at the best rates.
*Loan Tip: Since a personal loan is offered based on your personal credit history, you don’t have to worry about submitting your business records. However, you need to ensure that your individual CIBIL™ scores are excellent. Start by checking your latest credit score for free at trusted sites like CreditMantri. This gives you a clear idea of where you stand and the personal loan amount you are eligible for.
As mentioned above, having a good credit score is one of the biggest deciding factors for personal loans. Beyond that, there are no other eligibility requirements. In fact, you don’t even have to tell the lender that you will be using the loan amount for your business needs.
You don’t have to submit the business history, profit and loss statements, current account details and other business-related documentation. While you don’t have to provide business documentation, you will have to provide personal documentation like:
Now that we’ve seen the working of a personal loan for business let’s turn our attention to the positives and negatives of taking this route.
If you’re just getting started with your business or need capital to get it off the ground, qualifying for a small business loan becomes challenging. In this case, a personal loan can come to your rescue.
Getting approved for a personal loan is much easier than getting approved for a business loan. You don’t have to submit extensive business documentation like a detailed business plan, proposed usage of the loan amount, business tax returns, profit and loss statements, etc.
If you have an excellent personal credit score (750+), then the loan terms also work in your favour. You can negotiate for the best interest rates and get flexible repayment terms as well.
Business term loan processing takes several weeks or even months. In contrast, personal loans are readily available. Once approved, the capital reaches your bank account within 24 – 48 hours (and sometimes even faster).
If you’re looking for immediate cash to meet emergency business requirements, then a personal loan is your best bet.
Personal loans are unsecured loans, which are offered based on your credit profile. As a result, you don’t have to submit collateral or look for a third-party guarantee. This comes in handy, especially when your business is just getting started. You don’t own any collateral to pledge for a business loan.
Now, let’s look at the other side.
When you apply for a business loan, you can get loans up to Rs. 1 crore or even more, depending on your eligibility and your business’s nature. On the other hand, personal loans are of lower quantum.
Generally, the maximum personal loan amount that you can qualify for is 30 times your monthly income. For example, if the monthly income is Rs. 30,000, then the maximum amount you can get as a personal loan is Rs. 9 lakhs.
So, if you’re looking for large business loans, then opting for a personal loan is not the right choice.
Though personal loan lenders advertise low-interest rates, those rates are reserved only for borrowers with stellar credit scores and excellent credit history. If your credit score is less than ideal or you have other ongoing credits, then you will be charged high-interest rates. Steep interest rates increase your overall loan burden. You will have to pay a higher amount of money during the repayment tenure.
Compared with personal loans, business loans are cheaper as they have nominal interest rates.
When you take a personal loan for your business, you put your personal credit on the line. If, in the unfortunate case, your business fails and you fall behind on the loan repayments, your personal credit score takes a hit. Low credit history and late payments make it difficult to get approved for loans or credit cards in the future.
Even if you repay personal loan EMIs on time, it can still hurt you in other ways. Taking a personal loan increases your credit utilisation ratio, making it difficult to qualify for other loans like a car loan, home loan or even a new credit card.
Ideally, when looking for business financing, you should first consider business loans. Business loans are of different types like working capital loans, term loans, equipment loans, merchant invoicing, overdrafts, etc. See if you’re eligible for any of these loans. If yes, go for it.
Opt for business loans for business if:
Wrapping up, a personal loan can be used for business. However, it may not always be the best choice. Check if you qualify for business loans at low-interest rates. If that’s not possible, you can go for a personal loan as the last option.
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