Many business owners struggle with deciding between personal loans and business loans. After all, the two have their own distinct advantages. Business loans qualify you for large loan amounts, but are often difficult to obtain and require personal liability. Personal loans, on the other hand, are easier to obtain and don’t require collateral, but offer less in terms of loan amount.
To help you make an informed decision, this guide will explore 4 key differences between business and personal loans as well as some of the applications of each.
A business loan is an amount of money that a person borrows from a lending institution (often a bank) to help pay for the current or anticipated expenses incurred by a business.
This could include costs involved in buying supplies or raw materials; purchasing, maintaining, or upgrading equipment and machinery; providing payroll to any employees; and other expenses that come up as part of normal business operations.
A personal loan, on the other hand, is money that a person borrows for a variety of purposes, including business.
A borrower might take out a personal loan for things like personal expenses or lifestyle expenses; covering short-term costs; funding a significant life event such as a wedding, funeral, or move to a different city; or preparing to launch a project of some kind.
It is also possible for an individual to take out a personal loan and then use it to start a side business . However, people who choose to do this will need to keep certain things in mind; for example, a personal loan will probably have a much lower borrowing limit than a business loan. We’ll cover this and similar other details in the next section.
Because business loans and personal loans are taken out for different purposes, borrowers should familiarise themselves with the notable characteristics and differences of each type of loan.
Business loans often allow for a large amount of money to be borrowed, due to better cash flow potentially generated from businesses. On the other hand, personal loans usually offer a smaller amount of funding due to the limitation in personal cash flow.
Also, lenders expect that each loan type will be used for a specific purpose. An individual person who needs to cover expenses or renovate their home will probably need less money than a startup company that wants to grow rapidly.
Business loans usually allow borrowers to make repayments over a longer period of time (also known as having a longer loan tenor). This is because the amount that is loaned (and to be repaid) in a business loan is much higher than the amount for a personal loan. In other words, the borrower has more debt to repay, but also a longer time in which to repay it.
Personal loans are often more short-term, with a shorter loan tenor. This is for a similar reason as above: personal loans involve lower overall amounts, so borrowers are expected to pay the money back in a shorter time. Exactly how short the repayment period is will depend on the specific lender.
Lenders who provide business loans, such as large banks, will likely want to assess the business’s financial records and viability of the business model. Business loans are largely cash flow driven and dependent of the certainty of the company being able to perform its business and get paid by their customers.
This is a reasonable safety measure because the lender wants to be confident that they are loaning money to a trustworthy and reliable borrower (and as described earlier, the amount being loaned might be substantial). In this case, borrowers who wish to take a business loan from a bank will need to have a good credit score and business history, and possibly a steady form of income as well.
As for personal loans, the borrower’s personal credit history and income stream may also be assessed, though this will probably have different standards or requirements compared to a business loan.
For example, Friday Finance conducts its own internal credit assessment when processing a loan application. We also use alternative credit scoring to take into account the reality that entrepreneurs, freelancers, and other similar borrowers often have unpredictable or volatile incomes. While these individuals may possibly be given a low credit score and denied loans from banks, Friday Finance takes their current and future earning capacity into account for its own credit assessment – giving these borrowers a fighting chance at getting the funds they need.
Friday Finance is a licensed moneylender subject to the rules and regulations set by the Ministry of Law that provides both secured and unsecured personal loans.
We believe in making things fast and easy for borrowers, which is why we get approval of loan applications done within 1-2 hours. We then do a quick verification, face-to-face meeting with applicants, and contract signing at our premises before releasing the funds. Borrowers can expect to receive the loan within the same day of that contract signing.
For any other questions you may have, check out our FAQ; or get additional tips and advice from our blog.