Key Differences Between Business Loan and Personal Loan – A Quick Guide

Personal and business loans are popular debt financing option in India. Almost every banking (except payments banks) and non-banking financial institution hands out personal and business loans. Recently, it has become quite straightforward for an individual or an SME to acquire loans quickly, thanks to digitisation, fast approval processes, and minimum documentation requirements.

So, apart from the difference of purposes & usage, how else does a personal loan differ from a business loan?

A personal loan is a debt that any individual can take if they meet the appropriate eligibility criteria. Personal loans can be taken for various purposes, from buying goods to construction & renovation, education, and the like. The purpose behind availing of personal loans vary widely and generally intersect with the reasons behind availing of varied other loan types such as car loan, education loan, home loan, & the like. However, many business owners also take personal loans for varied business purposes.

Business loan products in India have increased immensely in recent times. There are numerous loan schemes for MSMEs offered by the vast majority of both public & private sector commercial banks and even non-banking financial companies. The Government of India has online platforms for businesses to avail of diverse credit financing and covers unsecured business loans through credit guarantees & coverage.

While business loans are tailored to meet specific business needs, many business owners avail of personal loans to meet business finances.

What is a Personal Loan?

Personal loans are unsecured loan products designed for flexibility, and multiple end uses. The loan amount varies per the borrower’s requirements and the lender’s criteria.

Like small business loans, personal loans can be availed from both banks & NBFCs. Quick and easy loan approval ensures one can avail of these loans under the most pressing circumstances. Lenders do not impose any restrictions regarding end usage and the loan amount.

Advantages of a Personal Loan

Personal loan schemes offer quite a few prominent advantages.

• Flexibility in end usage

You can use the money to meet varied personal needs as well as any business needs. All you need is a good credit score, and lenders will be more than inclined to offer large loan amounts at favourable interest rates without any restrictions regarding end usage.

• Easy To Apply

Some major benefits of personal loans are minimal documentation, simple loan eligibility criteria, quick approval, and fast disbursal.

• Zero Collateral

You do not need to pledge collateral while applying for personal loans. All you need is a very good credit score and a valid & sufficient income source.

• Optional Tax Benefits

Personal loans secured against personal assets such as land & properties generally come with tax exemptions.

Disadvantages of Personal Loan

Personal loans come with certain drawbacks and restrictions as well. Here’s a look.

• Personal loan interest rates are generally higher than most other loan types.
• It would be best if you had a substantially high credit score and an impeccable personal credit history to avail of favourable loan schemes.
• The loan amount available through personal loans tends to be lower than business loans. Personal loans are generally not secured and are thus not tax deductible.
• The interest paid for business loans can vary as many business loan schemes in India offer floating interest rates.
• Tenures of personal loans are fixed right from the beginning.

What is a Business Loan?

Business loans are designed to meet diverse business needs. Different business loan schemes are available in India, from term business loans & small business loans to working capital loans, start-up loans, and the like.

Business loans are ideal for those who do not want to intermingle personal and professional/business profiles. Business loan schemes offer substantially high loan amounts of up to Rs. 2 crore, long & flexible repayment tenures, nominal interest rates that can vary at the lender’s discretion, a wide variety of options, credit guarantees & coverage, and even zero collateral options.

Advantages of a Business Loan

Prominent advantages of a business loan are:

• Fast Approval

A good business credit score and satisfactory business turnover can speed up the loan. It is simpler to apply for a business loan, with processes becoming faster & more lucid. You must prove that you are an established business with healthy business turnover, pledge collateral, state the business requirements, and present necessary financial documents.

• Lower Interest Rates

The interest rates of business loans are lower than that of personal loans. In some cases, lenders even offer floating interest rates. If backed by collateral, then the interest rates of business loans are even lower.

• Flexible Loan Tenures

Business loans have longer repayment periods than personal loans.

• Building Business Credit and Limiting Liability

Availing of business loan schemes and repaying in time can boost business credit scores. And, in case of any worst-case scenarios, the borrower’s assets won’t come under the scanner.

• Tax Benefits

Most business loans are tax deductible.

• Avail of Large Loan Amounts

Banks and NBFCs offer business loans of up to Rs. 2 crores.

Business Loan Disadvantages

Just like personal loans, business loans have their drawbacks.

• To qualify, an existing business must possess strong financials and showcase effective financial planning.
• The documentation necessary is numerous and varied.
• Secured business loans are the most common financing products and require collateral.
• For a loan application to be approved, the business credit score must be high, and the credit history should be as perfect as possible. Businesses need to showcase strong repayment capabilities, and those in debt generally cannot avail of any business loan scheme.
• New businesses and MSMEs are generally charged high-interest rates.
• The lender may not approve the entirety of the loan amount.

Salient features: Business loans vs Personal loans

• Personal and business loans can be approved quickly if the credit score is good. For business loans, businesses need to showcase good turnover and financial health. In the case of personal loans, applicants need to have a minimum annual income.
• Personal loans are generally approved for lower loans, while business loan amounts can go up to Rs.2 crore.
• Business loans have longer and more flexible tenures. Personal loans generally have shorter repayment tenures.
• Personal loan schemes have higher interest rates than business loan schemes.

Differentiate Business Loans from Personal Loans

• Ease of Loan Application

Personal loan applications and approvals are much faster due to the absence of extensive documentation. However, the Indian Government and many banks & NBFCs have made things easy for MSMEs to avail of loans, thanks to priority sector lending.

• Collateral

No need for any collateral in the case of a personal loan. Standard business loan schemes, however, require collateral.

• Interest Rates

Personal loans come with higher interest rates as they are unsecured.

• Loan Tenure

Business loans have longer tenures than personal loans.

Should you opt for a business loan or a personal loan?

Think about your business’s financials, sales turnover, and existing liabilities. Think in tandem to avail of the loan. Due to the Central Government’s myriad initiatives, new businesses and MSMEs in India are now eligible for convenient business loan schemes. Secured business loans are always better options as they come with lower interests, flexible tenures, and refinancing options.

Choosing between a personal and business loan depends on your business’s circumstances and financial health.

FAQs

Can you use personal loans for business purposes?

You can use a personal loan for business expenses and other purposes.

Which loan is best for business?

Considering all things, business loans such as term loans, working capital loans, MSME loans, etc., are best for business.

How much loan can I get for a small business?

The maximum loan amount can go up to Rs. 40 to 50 lakhs.

What is the eligibility for a business loan?

Healthy financials, good turnover, good credit score, flawless credit history, all necessary documents such as last six month’s bank statement, establishment & incorporation records, GST & ITR filings, etc.

Can I use a personal loan to start a business?

Personal loans are end-usage agnostic, so you can avail of a personal loan amount to start a business.

Why are business loans cheaper than personal loans?

It’s because they are secured by the concerned business’s assets, the Government, or some regulatory body.

Is a business loan the same as a personal loan?

Strictly speaking, they are not. They differ in their features and end-usage.