When you start your own business and need funds to run its operations, the most common question that arises is – which loan to choose?
An entrepreneur often has two prominent, yet confusing, choices facing him – small business loans or personal loans.
For your understanding, let’s draw a comparison between the two based on a few parameters:
#1 Ease of availing With banks easing the application process for business loans, you can acquire one as easily as a private loan.
If you fulfill the basic eligibility criteria, you can actually get a business loan rather quickly. The loan will increase your financial power as well as raise the capital funding for your business. If a business can put aside more money, it will be able to apply for bigger business loans in the future and be able to pay for the capital and interest rates efficiently.
#2 Credit rating In the case of small business loans, the lender will examine a host of criteria –your personal credit, your business credit, your business plan, and the company’s financial statements and records. This process is a blessing in disguise for small business owners as it makes them strategize their goals well in advance and ensures that their business plans have a strong foundation.
For a personal loan, all that the lender usually looks at is your personal credit score. With no need to present a thought-through business plan, the outcome of a business taking a personal loan can be unsuccessful, leaving behind an even larger debt to pay.
#3 Liability When you opt for a personal loan, your personal liability is at stake. That is not the case when you avail business loans. In the unfortunate event you default on your unsecured business loan or face any financial difficulty during the repayment of your loan, your personal assets are not at any risk.
#4 Demarcation between professional and personal finances An overlapping personal and business financial situation has chances of getting out of hand while you are focussed on growing your business. By taking a business loan, you can keep both sides of your finances separate, making it easier when it comes to filing taxes and calculating interest deductions.
#5 Building business credibility It is advisable to use business loans to increase the credibility of your business rather than personal loans. The responsible use of business loans paves the way for additional financing options as your business grows. This includes higher lending limits and improved trade credit with vendors and suppliers.
Remember, if you use a personal loan while growing your business, in case the business defaults, your personal credit will take a hit. This is certainly not advisable as a failing personal credit score can be difficult to recover from.
Yes, you have two options but the choice should be clear. Make a wise decision to grow your business, keeping its long-term expansion in mind.