There are different kinds of loans that banks and other NBFCs offer as part of their services. These loans come in handy for various purposes, including kickstarting a business. While these entities may provide several products under the loan category, there are two major kinds of loans: business and personal.
Each of these loans can come in handy for different purposes. For instance, personal loans, as the name suggests, may be used for personal expenses, such as renovating your house or a medical emergency –
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What Is Business Loan?
A business loan is exclusively intended for your business entity. Typically, it is granted to your company rather than to you as an individual, and it comes with distinct eligibility criteria, interest rates, and repayment terms.
What Is Personal Loan?
A personal loan is a type of loan extended to an individual for personal use, such as financing major purchases, consolidating debt, covering unexpected expenses, or funding home improvements. Unlike business loans, personal loans are typically granted based on an individual’s creditworthiness and financial history, rather than being tied to a specific business entity. They may be secured by collateral (such as a car or home) or unsecured, and they come with fixed or variable interest rates and repayment terms.
Business Loan vs Personal Loan
Both personal and business loans have several advantages. When you talk about personal loans, there are not many restrictions on cash usage as with industry or other specific loans, such as home or car loans. So, personal loans are like the ‘jack of all trades.’
Also, you can get a personal loan with minimal paperwork, and their approval and disbursal processes are quicker than most other loans.
However, you will still need to meet some basic requirements to be eligible to apply for a personal loan, such as a good salary, or credit score, although you don’t need to submit collateral.
When it comes to business loans, you can get them at highly reasonable interest rates. Moreover, you don’t need to share profits with lenders unless they invest in your business, which is one of the best things about business loans.
There are several differences between business and personal loans, as there are advantages.
1. Loan Eligibility
One of the significant differences between a business and a personal loan is the eligibility requirements you must meet to avail of them. The debt-to-income ratio is another criterion most lenders consider when disbursing personal loans.
As for business loans, banks or lenders may ask you for the business plan, bank account statements, or profit-and-loss statements as part of the documentation process.
2. Purpose
Another significant difference between a personal and business loan lies in the purpose for which you are getting a loan. Here too, you may not need to state why you are getting a personal loan or how you intend to use it.
However, business loans may be a whole different case, where you may need to explain to lenders why you need the money.
3. Collateral
You usually don’t need to provide any collateral for getting a personal loan. However, collateral is one of the crucial requirements for availing of business loans. You may need to mortgage your office or factory spaces or offer other such collateral, especially if the loan amount is higher. But now business loan is also available without any collateral.
4. Tax
You don’t get any tax benefits by availing of personal loans. However, taxes are deductible for the interest paid for business loans.
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5. Tenure
Personal loans are usually short-term loans you must repay within five years. Business loans, however, have longer tenures than personal loans, and you will have up to 15 years to repay them.
6. Approval and Disbursal
Banks and other such lenders usually approve and disburse personal loans more quickly than business loans. Due to lots of paperwork and diligence, the approval and disbursal processes for business loans may take time.
Business Loan vs. Personal Loan
So far, you have seen some differences between personal and business loans. These differences may depend on taxes, collateral, and eligibility criteria. However, another significant difference between the two loans is the documents required for approving and disbursing them.
You will need the following documents for the approval of small business loans-
1. A recent passport-sized photograph.
2. Proof of identity and residence (PAN card, Aadhaar card, utility bills, etc.).
3. Business address proof.
4. Proof of the existence of business over the last three years.
5. Bank statements for the last six months.
6. Last three-year income tax returns.
7. Balance sheet and profit-loss statements.
8. A certified CA-attested financial statement.
9. Sales tax certificate.
10. Copy of the trade license.
11. A certified copy of the partnership deed if it is a partnership firm.
12. GST registration certificate.
13. Proof of ownership of the belongings used.
As for personal loans, you will need to submit the following documents-
1. Proof of identity and address (PAN card, Aadhaar card, utility bills).
2. Proof of income (ITR of the past two years, bank statements, profit, and loss statements).
3. Business proof if you own a business (Certificate of incorporation, proof of business existence, Certificate of registration).
Business Loan Interest Rates vs. Personal Loan Interest Rates
Business loans come in different types and help entrepreneurs set up new businesses and raise funds for existing ones. Many banks and NBFCs offer business loans at attractive interest rates. There are interest rates and amounts that meet the needs of every business. The following table shows the interest rate, amount disbursal, and tenure.
| Interest Rate | 8.85% per annum |
| Maximum Loan Amount | Up to Rs. 40 crores |
| Loan Tenure | 120 months |
| Processing Fee | 6.5% of the loan amount. |
Concluding Thoughts
Both personal and business loans come with a set of advantages and disadvantages. They also have notable differences in eligibility, tenure, tax, and collateral. So, it would help if you compared each loan type and the lenders before deciding whether you want a personal or a business loan.
There are various online tools, such as EMI calculators, that you can use to decide on the loans you want to get.
So, the next time you decide to avail of a personal or business loan, estimate the rate of interest, and EMI payable, using an online calculator. Also, don’t forget to consider things like eligibility, collateral, and tax benefits.
FAQ
1. Can a Personal Loan Fund My Business?
Yes. You can use personal loans for any purpose, including raising funds to set up a new business or fueling an existing one.
2. How Long will it Take to Repay a Business Loan?
It can take between five and ten years to repay business loans.
3. Which loan is a better option for funding my business? Business loans are ideal options for funding your business.
4. Is it acceptable to utilize a personal loan for business purposes, or vice versa?
Although you can allocate a personal loan towards certain business-related expenditures, you may not always be able to utilize a business loan for personal expenses.
However, there are potential solutions, such as if the purchase directly influences your business operations. For instance, purchasing a phone for communication with customers, which you also use for personal matters, could be considered an example of this scenario.
5. Is it possible to obtain both a personal loan and a business loan from the same lender?
Certainly, you can acquire both types of loans from a single lender, provided they offer both services. Opting for a lender with whom you already have an established relationship may increase your chances of approval, as they can assess your existing standing with them to determine your eligibility.