One of the biggest problems that most small business owners face is the shortage of funds. It can be due to a number of reasons such as delay in payments, additional investment in infrastructure, working capital requirements, etc. In the end, you are left scurrying for additional sources of finance to manage the situation. There are various types of credit facilities that you can avail of for your requirements, the most popular options being a Personal Loan or a Business Loan.
Business Loan vs. Personal Loan: Which is better for a small business?
The major reason behind the popularity of Personal Loan and Business Loan is the fact that a bank loan doesn’t challenge ownership, while other external sources of funding may require you to partake with your share in the business. But a common question that beckons all small business owners is which of these two options is more suitable for their requirements.
Let us discuss it in detail below.
|Particulars||Business Loan||Personal Loan|
|Availability||Available only for business owners (sole proprietor, partnership, and private limited enterprise)|| |
Available for salaried as well as self-employed individuals.
|Nature of Loan||Available as secured loan as well as an unsecured loan|| |
Available as an unsecured loan only
|Usability||Can be used only for business purpose|| |
Can be used for personal expenses as well as for business expenses
|Application Process||The application must be completed physically at the branch|| |
The application can be completed online as well at the branch
|Maximum Amount||The maximum available amount is Rs. 50 Lakhs*|| |
The maximum available amount is Rs. 40 Lakhs*
|Interest Rate||Starting from 11.50% per annum||Starting from 10.75% per annum|
|Repayment Tenor||Maximum up to 5 years*||Maximum up to 7 years*|
|Tax Benefits||Interest paid can be claimed as an expense|| |
Interest paid can not be claimed as an expense
*may vary as per the applicant’s profile and requirements.
- Business Loan: When it comes to availability, Business Loans have been exclusively designed for small business owners. You can Apply for a Business Loan, only if you have a registered business unit operating for the last three years. Business Loans are available for all types of businesses, including proprietorship, partnership, and private limited companies.
- Personal Loan: In case of a Personal Loan, most lenders offer the facility only to salaried individuals., though some lenders also offer Personal Loans to self-employed individuals. So, you can borrow a Personal Loan in your individual capacity only, not as a partner or director of the firm. It is also a good alternative for a new business owner who is not able to eligible for a Business Loan.
- Business Loan: Business Loans can both be secured and unsecured in nature, depending on the amount of money you require and the purpose of the loan. For instance, if you acquire any asset with the loan amount, it will have to be hypothecated with the lender. Though, you have the option to avail of the facility as a Term Loan or an Overdraft.
- Personal Loan: Personal Loans are unsecured, i.e., you need not offer any collateral to avail the facility. Whatever you do with the loan amount, you do not need to inform the lender. Though, the money can not be used for gambling or speculative purposes.
- Business Loan: The money borrowed as a Business Loan can be used only for business-related expenses. You are not allowed to use the money for your personal expenses.
- Personal Loan: The money borrowed as a Personal Loan can be used for any financial requirement of yours. Whether it is a business expense or a personal expense, you can use the money without any intimation to the lender.
- Business Loan: The application process for a Business Loan involves filling-up a physical form and submitting physical copies of all the documents. As such, the processing time can run into a week or even more.
- Personal Loan: Most lenders now accept Personal Loan applications through online channels, including websites and mobile app. You only need to fill in a few basic details and upload scanned copies of documents to start the process.
- Business Loan: When it comes to unsecured Business Loans, the maximum amount available can extend up to Rs. 50 Lakhs, depending on the city. For instance, the maximum amount available as an HDFC Business Loan for metro cities is Rs 50 Lakhs, while for other cities, it is Rs. 40 Lakhs.
- Personal Loan: The maximum amount available as a Personal Loan in India can extend up to Rs. 40 Lakhs. This amount can vary according to the city of your residence.
- Business Loan: Interest rates applicable to Business Loans are generally on the higher side. Presently, the Business Loan Interest Rates in India start from 11.20% per annum for SBI Simplified Business Loan.
- Personal Loan: Interest rates against Personal Loans are extremely competitive in present times. Presently, one of the attractive interest rates are available for HDFC Personal Loan, starting from 10.75% per annum for salaried individuals.
- Business Loan: Repayment tenor for unsecured Business Loans is generally ranging between 48 months to 60 months, depending on the lender.
- Personal Loan: Repayment tenor for a Personal Loan ranges between 24 months to 84 months, which is significantly higher than Business Loans.
- Business Loan: The amount paid as interest can be claimed as an expense in case of a Business Loan, thereby reducing your income tax liability.
- Personal Loan: There is no provision of an income tax deduction for interest paid against a Personal Loan. So, it will have to be borne out of your personal funds.
Now that you have a proper understanding regarding different aspects of a Personal Loan and Business Loan, making the decision will be somewhat easier for you. Always remember to exercise due diligence before opting for a loan to fund your business expenses.
Also Read: 3 Situations Where a Personal Loan Can be a Better Choice Than a Business Loan
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