If startup bug has bitten you, things can be both exciting and challenging for you. Though you might have come up with the best business idea, without the right finance option, it might not be easy to give ‘wings’ to your business. Small businesses are often caught in a dilemma of which loan option to pick—Small Business Loan or Personal Loan.
Undeniably, it is a daunting task to decide between a business loan and personal loan. You might be tempted to use a personal loan to fund your short-term needs, however, it is advised to go with a business loan instead of personal loan due to the following reasons =
1. Adverse impact on your borrowing ability= When you take a personal loan to fund your business, it curtails your chances of seeking another loan in the future. Irrespective of the quantum, every loan that you take increases your debt outstanding. It can go against you if you need to raise money to deal with an urgent requirement.
Here, it is important to note that financial institutions measure an individual’s ability to repay debts with the help of debt-to-income ratio, which includes credit cards as well. As a debt load above 50% is risky, if you mix both personal and business loan requirements, you might cross the threshold limit.
2. Affect your credit history= Your credit history depends on your loan and credit card usage. While, it will be positive if you have successfully serviced all your loans and pay credit card dues on time, it will have an adverse impact on your credit score if you do not stick to the repayment schedule.
Undeniably, business is a risky affair, and it can pose problems if your ability to repay loan depends on its success. Your irregular repayment schedule can lower your credit score which means financial institutions would either refuse to approve your loan in the future or charge high interest rates.
3. Loan products are different= Loan products targeted to individuals and businesses are different in terms of tenure, nature and interest rate. A business or commercial loan can include overdraft, cash credit, collateral loans, etc. Each product has been specifically designed to take care of the financial needs of investors of that class.
When you use an individual loan for commercial reasons, you might lose some benefits of small business loans. For instance, small business loans are available at exciting interest rates, and the tenure is much longer than a personal loan if the collateral is provided.
Moreover, financial institutions like Aditya Birla offer business loans for divergent requirements, like for meeting working capital requirements, setting up the office, buying machinery, etc. As per your business requirements, you can choose the aptest loan.
4. Risk of paying high interest rates= In most of the situations, personal loans are unsecured and therefore, come with a high interest rate. However, business loans are available at low interest rates with the easy repayment schedule.
5. High chances of misuse of funds= When you cross that thin line, which separates your business and personal finance, it can lead to misuse of funds. It can have an adverse impact on both your personal and business finances.
6. No boost to your business credit score= Having a sound business credit foundation should be your prime priority. A good business credit score not only makes you eligible for a larger loan amount but will also give you access to materials, inventory, equipment and services which you might require without being paid up front.
However, there can be a catch 22 as you need to have some business credit score to show that you can act responsibly with your business credit. If you take a personal loan for your business, you won’t be able to build your business credit score.
Many people prefer a personal loan to finance their business requirements, as the loan is easily available and no questions are asked on its application. Having said that, the personal loan amount that you raise can be significantly lower than the business loan, and it can be directly related to your earning.
Also, it is easy to manage your loan book if you segregate both commercial and personal loans. You can take a small business loan as per your requirement and keep track of it.
So, now you’ve got both the options— personal loan and business loan, it’s all about finding the right one. Even if you have decided to merge the both, be attentive!