What is the difference between a personal loan and business loan?

What is the difference between a personal loan and business loan?

Business Loan or Personal Loan?

A common question which arises in every entrepreneur’s mind is whether to choose a business loan or a personal loan to start or expand their business. A sudden spike in the sales might create a requirement for additional cash flow. However, most of the businessmen opt for a business loan, but some still choose a personal loan because of its simplicity, easy application process, and less paperwork. While the principles which are applied to a personal loan and business loan are the same, but there are many differences between personal and business loans, some of which you might not be aware of. As with any financial product, there are different merits and demerits of both loans. The article below shows the difference between the two.

Definition:

  • A personal loan is a loan which is given to the person to use for any purpose.
  • A business loan is a loan which is given only for the business purposes. There are various types of business loan, that are suitable to the needs of different types of businesses such as the mezzanine financing, bank loans, the invoice financing and also asset-based financing.

Difference between Personal Loan and Business Loan 

BasisPersonal loanBusiness loan
APR (Annual Percentage Rate)In case of a personal loan, both variable and fixed interest rates can be offered. Some lenders might charge stating the annual percentage rate (APR) as low as 3.99% or even lower.Many business loan lenders charge different interest charges, on the other hand, some business loan lender charges monthly rates instead of annual percentage interest rates.
Loan AmountThe Personal loan amount will be lower than the business loan.The business loan amount can be much higher than a personal loan.
EligibilityFor a Personal loan, an individual must have a good credit score or a lending institution can determine his/her income information and debt to income ratioFor a business loan, an individual should be more active in business finance than personal finance.
TermsIn case of a personal loan, one can get loan tenure between 1 to 7 years not more than that.In the case of a business loan, one can get both long-term and short-term loan.
Application processThe application process can be easily completed online in a few minutes or hours.For a business loan, one needs to submit their business plan and accounting details with their application process.
The Usage RestrictionsThe personal loan amount can be used for any purpose or one can apply directly for usage like buying a car or home etc.A business loan can be used in any business process like equipment purchase, hiring new employees, expanding the business, etc.

Personal Loan

Benefits of personal loan:

  • The personal loans can be obtained through the easy application process.
  • For securing personal loans the lending institution will evaluate your credit score and your personal information like your income information, job information, etc.
  • There is no restriction on the usage of loan amount one can use it for any purpose.
  • No need for any collateral security.
  • Any person without any security just by showing his or her personal details can get the personal loan.
  • Thus, the application process of a personal loan for a business is much easier than the business loan.

Drawbacks of personal loan:

  • One of the major drawbacks of the personal loan is that it provides the limit which is lower in comparison to which interest rate is higher.
  • Any person who is taking a personal loan for a business is denying his or her business opportunity to get a business loan in future.
  • There is an absolute possibility that one might not get the amount for his or her business
  • The tenure of a personal loan cannot be extended for more than 7 years.

Business loan

Benefits of business loan:

  • The business loan helps a person to improve the opportunity in future to get a loan by securing good business credit, which is one of the essential things while your business grows.
  • If one will be getting a loan through the business it will deduct the owner’s personal liability towards his business.
  • In addition, if one will be using a loan in a responsible manner, then it will improve the financial credibility of the company which will further open great opportunities.

Drawbacks of business loan:

  • The approval and application process of business loan can be tedious and lengthy.
  • Getting loan amount through a business loan for expanding your business can be difficult.
  • If you are an entrepreneur or if your business is not running well then you must have a good credit to get a business loan.
  • You might need to provide collateral or personal guarantee depending on your situation to get a business loan.

Values:

  • Personal loans that are related to most of the people are of smaller value. The lender only intends to determine the ability to make the repayments which are set out in the loan’s terms and conditions. This can thus be an advantage or a disadvantage depending on the personal circumstances.
  • Business loans can generally be of much higher value compared to personal loans unless the borrower takes out a sizeable mortgage. While some of the small business loans at the lower value end are similar in many ways.

Process:

The process for a business loan from a bank is thus quite a detailed and lengthy process with an extensive application when compared to personal loans.

Documentation:

  • While the tax returns, the credit report, and pay stubs are the only documents which are required for a personal loan, it is however also necessary to bring a financial statement for the past 3 years in addition to the other documents to get a business loan.
  • Many lenders who provide business loans do not require a guarantor in order to approve an ability of a customer to repay the credit.
  • Though in case the business takes out a loan, its owner, thus signs the loan documents and serves its guarantor.
  • In case of a personal loan, once the loan sanctioned, there is generally no further follow-up by the lender as long as the payments are made as they are agreed upon.