Business Loan Versus Personal Loan: Which One Is Right For You?
A loan can help an individual to meet the financial requirements whether it is for business or personal use. An individual can opt for a loan according to nature of the cash requirement.
The need for additional cash that exceeds the money available in the bank at a particular time can arise due to various factors, personally or professionally.
It can be to meet an emergency requirement for personal use, say a health exigency or to buy something urgently or even to cover day-to-day expenses at home if the salary is delayed or for a sudden unforeseen expenditure.
It can also arise at the workplace if one is running a business as cash inflows via client receipts are delayed while vendor payments have to be met upfront or to cover for an expansion project.
A loan can help meet the financial requirements for personal or business use. Lenders have created custom loan products to not just cater to specific needs but also to underwrite risks based on the end use of the money availed by a borrower.
As a result, the type of loan one opts for needs to be synced with the specific use of the money. This is important not only to make it an efficient transaction with lower interest rates but also to avoid rejection of the loan application.
In simple words, if one needs a loan for personal use, one should not take a business loan and while a personal loan can be used to meet short-term business requirement, it should be done so only in special cases.
These loans are meant to meet working capital requirements of running day-to-day operations of a business or for meeting the gap between vendor payments and client receipts such as for up-front inventory or raw material stocking. These loans can also be availed for long-term expansion.
To maintain financial discipline, one should not mix the need for cash for personal use by availing a business loan just because one can. Also, even though these loans are provided by the lender based, at least partly, on the credit history of the owner, it is largely sanctioned on the basis of cash flows and revenues of the business enterprise.
These loans are meant for meeting short-term personal cash requirements. It could be a medical emergency, paying school fees for children when salary is delayed, buying household items and wedding expenditures.
More often than not, personal loans carry a higher interest rate than a business loan. One can take a personal loan for meeting the needs of the enterprise when a business is not eligible for a loan because it was started recently and does not have the vintage of six months to two-three years that lenders insist on for sanctioning money.
A loan needs to be availed based on the end use to maintain financial discipline. One should take personal loan only to meet emergency requirements at home. Similarly, business loans should be taken only for the enterprise.
To be sure, there are times when a personal loan can be taken for business expenses, but this should be treated as an exception rather than the rule.