Last updated on November 23rd, 2021 at 03:11 pm
Cash is a crucial requirement for every facet of life, personal needs, as well as for businesses. Immediate requirements of cash can arise anytime for various reasons, leisure, need, or emergency.
A business person may need a cash infusion to fund his firm’s growth, buy raw materials, or meet imminent business expenses.
An individual or a business may or may not have liquid cash available at the time of need. At such times one may borrow from friends, family, use their savings or avail a loan.
There are different loan options available in the market.
Which type of loan can you avail of?
Can you avail both?
Let us find out the key differences in both the types of loans and eligibility.
1. Personal Loans
Personal loans are ideal for personal requirements like weddings, education, health emergencies, big-ticket purchases, etc. A personal loan is easily available without collateral. The process of availing of the loan is fairly quick and simple. A bank or financial institution assesses your personal loan eligibility based on your identity and income documents, and within a few hours or a day, the loan is disbursed.
2. Business Loans
Business loans are meant specifically for the business requirements of small and medium enterprises. Capital requirements, payment of monthly expenses like rent, salaries, raw material, equipment purchase, etc., require upfront cash expense.
A business loan solves these urgent cash needs. Business loan eligibility is determined based on the health of the business. You need to submit documents such as profit statements and balance sheets, and after assessing the firm’s creditworthiness, the loan is approved. The creditworthiness of the promoter and their solvency are also considered when assessing the loan application.
Differences Between Personal Loan and Business Loan
Collateral: A personal loan can be availed without collateral; it is an unsecured loan. A business loan may require collateral in the form of property, goods, or machinery, especially when the loan quantum is large.
Purpose: A personal loan can be used for any purpose, whereas a business loan must be used for intended business needs.
Tenure: Personal loans are given for a maximum of five years, whereas business loans are issued for more extended periods, depending on the requirement and strength of the business.
Interest Rate: Banks and non-banking financial institutions offer attractive personal loan interest rates. Institutions may offer better rates depending on a borrower’s credit history, income, etc.
Business loans are issued so that enterprises can use the funds to fuel their business growth. Therefore, these loans are offered at much lower interest rates.
Is it allowed to have a Personal Loan as well as a Business Loan?
Yes, an individual can avail of both types of loans at the same time. The lender will assess the creditworthiness, existing personal debt vis-a-vis the income, credit history, and other financial parameters for the personal loan.
For a business loan, the business viability is assessed based on past performance, cash generated, profit, debt, payment history, sales, turnover, etc. The lender carries out due diligence regarding the ability to repay the loan before sanctioning it.
Both the loans can be taken simultaneously, as long as the credit due diligence is satisfactory and the ability to repay both the loans is established.
A business loan is better suited for sole business purposes because the interest rate is lower, which means lower EMIs. The longer tenure ensures no stress on cash flows in the immediate future when business is in a growth phase.
A personal loan is useful for all personal requirements and even cash infusion in the business. There may be a scenario where the business loan amount sanctioned is not adequate.
For any immediate short-term cash requirements, a personal loan is helpful along with the longer tenure business loan. Use a business EMI calculator to check the EMIs before applying for a loan.