As capital becomes more affordable and is critical for businesses to grow, the market today is flooded with several personal loans as well as business loan options.
But whether you should opt for a business loan or a personal loan is tricky because the answer is not always straightforward. So here’s a detailed comparison to help you make an informed decision.
What is a business loan?
Any financial assistance provided by banks/financial institutions or NBFCs to a business is a business loan. There are various types of business loans available in the market, and they address different requirements of a business. Some of the popular ones include:
- Short-term loans
- Line of credit
- Equipment financing
- Merchant cash advance
- Overdraft facility
- Working capital loans
All businesses, including retailers, sole-proprietors, privately or publicly held companies and partnership firms are eligible to apply for business loans.
However, you must utilise the amount for running the business and helping it scale up. For example, purchasing inventory, meeting working capital requirements, warehousing needs and hiring new employees are some of the permitted end-use of a business loan.
What is a personal loan?
Personal loans are unsecured loans provided by banks, financial institutions or NBFCs to anyone who requires financial assistance.
Apart from salaried individuals, self-employed professionals such as business owners who are at least 25 years old and residents of India are also eligible for such loans.
The absence of any end-use restrictions of the loan amount makes personal loans an incredibly popular option. You are free to use the funds for any purpose, including business expenses.
Salient features: business loans vs personal loans
Personal loans can be quickly approved if you have a good credit score and can show a steady flow of income. When it comes to business loans, a good credit score is the most important factor to qualify for the same. You may also need to show the number of years your business has been in the industry and sufficient annual revenue.
You can apply for a business loan amount between Rs. 1 lakh to Rs. 20 crore. The lender decides the final amount based on your profile, audited financial statements of the last 2 to 3 years and the purpose of availing of the loan. On the other hand, you can avail a personal loan of up to Rs. 50 Crore.
As far as repayment is concerned, a personal loan comes with a shorter tenure. Business loans, on the other hand, tend to have longer tenure. Thus, you may have to pay more money in the form of EMIs per month when opting for a personal loan.
The interest rate for business loans ranges from 14% to 25%. The lender decides the final rate on a case-to-case basis by taking into account other factors. These include your creditworthiness, business plan, turnover, sanctioned loan amount and repayment tenure. The interest rate for personal loans ranges from 10% to 35%. However, you can negotiate for cheaper rates with impeccable credit history and CIBIL scores higher than 750.
If you apply for a business loan, you can enjoy tax benefits on the interest payable. You can deduct the interest from the gross income, lowering the overall tax liability of your business. Personal loans for businesses secured against assets such as land, securities, or other property are exempted from taxes up to an extent. However, personal loans for businesses don’t carry any tax benefits.
You don’t need to furnish any security against personal loans. But you must demonstrate sufficient monthly income for making timely repayments. On the other hand, depending on the business loan amount, the lender may ask for collateral security or personal guarantees.
Lenders usually charge a nominal amount of 2% to 3% of the principal as processing fees. In personal loans, most lenders impose pre-closure charges of up to 5% of the outstanding loan amount for early repayment and a processing fee of 2% to 3% of the principal amount.
Should you opt for a business loan or a personal loan?
The decision depends on various factors.
If you are an established business that needs a significantly large amount of funds to expand its operations, business loans are a great option. You can borrow at a comparatively cheaper interest rate, choose a longer repayment period and enjoy tax deductions. However, make sure that you have assets to offer as security against the loan.
On the other hand, if you have just started your business and need a relatively smaller loan amount for a shorter duration, go for a personal loan. As these loans are unsecured, they are better suited for newly established businesses with no assets to offer as security. However, be prepared to pay a much higher rate of interest compared to business loans.
Quick business loans by Razorpay
Are you in need of a business loan to finance your business? With Razorpay Line of Credit, you can get collateral-free loans at attractive interest rates. The application process is incredibly swift, with zero processing and annual fee. Businesses can also choose from various loan repayment options on a daily, weekly or monthly basis.