When you are a business owner of a small enterprise, and looking for funds. You have the option to consider Personal Loan or Business Loan to your company.
Both these can fulfil the financial needs of your business, such as sponsoring a new project, working capital, purchase inventory, hire new staff, etc. For new business owners, options for loans might be fewer given lack of a proven financial record on the company. which may prompt weighting both these borrowing options, and then choosing the ideal one.
But, how do you go about selecting a personal loan or a small business loan for your company? Below, we have done our share of reasoning to make it easier for you to pick between the financing alternatives.
Difference between a Personal Loan and a Small Business Loan
A small business loan is a cut-out for business purpose only, and a personal loan is meant for personal needs. Both are easy to qualify for if you have the required credit rating, and flexible in terms of quantum of finance, tenure, and other terms and conditions. A personal loan is a multi-purpose loan, so you can put it to use for a business purpose as well, but a company loan can be used for company-related expenses alone.
Personal loan approval depends on your personal credit history, age, personal income, repayment capacity, etc. On the other hand, business loan approval depends on the credit rating of the company, annual turnover and profit generated by the organization, audited financial reports, and other factors.
- Uses of Business Loans
You can use funds from a business loan to finance inventory, buy an existing business, renovate a workplace, opt for a new work location, arrange working capital, or anything related to your venture. There are different and specific business loans as well, such as the equipment loan, which can be used to only purchase equipment for the company, or invoice financing, which can be utilized for accounts receivable. There are unsecured and secured loans, and you can choose one as per your requirement.
- Uses of Personal Loans
You receive a lump sum amount in your personal bank account on taking a personal loan. These funds can be utilized for any purpose, but borrowers usually use the funds for emergency expenses, or tasks such as home improvement, vehicle repair, and in many cases, weddings, medical bills, educational costs, etc. In dire times, you can use the money for your company as well.
- Use of Either Loans Interchangeably
Can you utilize a small business loan for personal expenses? Can you use a personal loan for company costs? The latter is already answered in a ‘yes’, from the pointers mentioned above. But, you may not always be allowed to use a company loan for personal expenses, until these are linked to the business in some way or the other. It is also riskier to muddle both the finances together, like a business loan if secured and defaulted on, can put the business assets at risk. Thus, it is best to use the funds for the purpose these are directed for than utilize these interchangeably.
Tips to Opt for a Personal Loan or a Small Business Loan for Your Company
- Make a Habit to Separate Personal and Business Finances
As a small business owner, there is often a thin line between personal and professional life, but the fact is, it is best not to mix those together. The fact extends to finances as well. Otherwise separating out transactions during tax time can get troublesome. If you draw your personal funds into the business, you may not always get the facility and legal protections as you would on using business funds for company expenses.
Keep a separate bank account for your personal savings and that for the company. Once you get used to maintaining accounts of personal and business spending differently, you will be able to identify if you need a small business loan, and how to go about getting one from the right source. And in case you think the business does not qualify for a company loan, then you can take a personal loan instead.
- Compare the Interest Rates
At times, a personal loan interest rate could be lower than the rate on a business loan, and vice-versa. Thus, you can compare the interest rate and offer across banks and NBFCs for both these loans, and then pick the one that is most affordable with terms and conditions matching your need. In some cases, a personal loan is valid only for salaried individuals then the next best alternative is a business financing product.
However, certain personal loan schemes are available for professionals such as lawyers, Chartered Accountants, consultants, doctors, etc. So check out if there are any such loans you can put to use.
- Startup Costs
To get a traditional business loan, your company must have at least 2 to 3 years vintage, with sufficient credit history and financial record to establish an account of turnover and profit. To build a company credit score, you can start with a business credit card. Otherwise, it is hard to secure funds based on insufficient company financials and operation history. This is one of the hindrances that startup organizations face. So, if a small business loan does not work for you, try out the personal loan option.
Finally, Should You Opt for a Small Business Loan or a Personal Loan?
Primarily, take a personal loan if you have a startup with no or little business history. But at the same time, your personal credit score must be excellent, and you should draw a big monthly salary. However, take a company loan if the main source of income is your business and you are unwilling to put all of your loan risk on personal credit. A business loan establishes a good rapport with the lender, so if you are looking for future financing for your company, then a small business loan is a great alternative.