How is a Business Loan different than a personal loan?


There are several aspects that you must take care of before starting your own business. Apart from market research and knowing your potential customers, you should also look for ways to fund your start-up. Due to the high-risk associated with start-ups, availing funds can be a challenging task. However, with the help of proper research and by taking accurate measures, you can successfully fund your business idea.  The most common financing options are business loans and personal loans. Let us understand both these credit products in detail so that you can make a well-informed decision while availing a loan for small business.

Business loans

  1. Business loans are a popular financing option for start-ups. The eligibility criteria for business loans may vary from one financial institution to another. 
  2. Due to the progress in the banking and finance sector, availing a business loan has become a comparatively easier. You must compare various loan offers provided by different financial institutions to avail a business loan at the most competitive interest rate.
  3. The repayment of business loan is done through monthly instalments. You can get an estimate of your monthly instalments with the help of an online EMI calculator. This can help you plan your monthly budget wisely.
  4. You can avail a higher loan amount with the help of a business loan. The amount can be used for purchasing equipment and inventory as well as for business acquisitions, introducing new branches, etc. 
  5. Most lenders will check your personal credit score, annual income, profitability and age of your business before approving your loan application. Due to the stringent eligibility criteria of business loans, many start-ups fail to get a business loan.
  6. While applying for a business loan, it is essential that you read all the terms and conditions of the loan agreement carefully. This will help you avoid any inconvenience in the later stages.

Personal Loans

  1. Personal loans are multipurpose loans that can be availed for many reasons. Financial institutions do not enquire you about the purpose behind availing the loan before approving the loan application. Therefore, it is one of the most viable funding options for start-ups.
  2. A good credit score can help you avail a high loan amount at a low interest rate. Also, personal loans can be easily availed online with the help of leading banks and Non-Banking Financial Companies.
  3. The eligibility criteria for personal loans are not as stringent as they are for business loans. Therefore, if you are a newbie in the business world, a personal loan would be a better financing option.
  4. Personal loans are generally unsecured loans. Therefore, you don’t have to pledge any collateral while availing a personal loan. This keeps your valuable assets safe in case you fail to make timely repayment of the loan amount.
  5. It is to be noted that the lending limits of personal loans are usually lower as compared business loans. Thus, there are chances that you might not be able to secure all the money you require for your business by availing a personal loan.
  6. Since personal loans are unsecured loans, the rate of interest associated with them is comparatively higher. Repaying the personal loan with higher interest rate can erode a percentage of your profit.

Business loan vs Personal loan

  1. It is advisable to opt for a business loan if your business has an established financial history. If you are looking forward to expanding your business then a business loan would be a better source of financing. Also, since business loans are usually secured loans, make sure that you have sufficient collateral from your business to use for the loan. You must evaluate your repayment capacity carefully before availing a business loan.
  2. You can consider opting for a personal loan for your business if your business is new and hasn’t built credit. Make sure that you have an excellent credit score while availing a personal loan. This will help you avail a personal loan at a comparatively lower interest rate. 

Now that you are well aware of various features and benefits of both these credit products, you can make a better choice while availing finance for your dream start-up.