When an entrepreneur is starting a business and cannot use his or her savings, or raise funds easily, business loans ensure sustainable growth of the business. Entrepreneurs who wish to nurture and create a successful business empire and a sustainable brand must apply for a business loan rather than go for the easier choice of personal loan.
What is the difference between a personal loan and a business loan?
Here are some of the important differentiating points between personal and business loans:
- Interest rate
Personal loans are designed by financial institutions to help meet an individual’s personal needs like wedding, home refurbishment, or other emergency cash needs. The interest rates associated with personal loans are generally high. Personal loans may not be ideal for entrepreneurs since they could end up incurring a higher cost of funds especially if their business is in the nascent stage. This is when business loans can prove to be helpful for them.
A personal loan comes with shorter tenure as far as repayment is concerned. Business loans, on the other hand, tend to have longer tenure. Thus, entrepreneurs may have to pay more money in the form of EMIs per month when opting for a personal loan. This could impact the cash flow of the business and damage its growth in the early stage.
- Lending terms
Funding a business with the help of a personal loan could mean higher interest rates and also the associated EMI payments. In such cases, there is a higher probability of default which could bring in cash flow troubles in the future. This is why most business owners find it challenging to establish credibility and fetch better lending terms in personal loans. This indicates that business owners are better off with business loans.
- Usage of funds
If business owners borrow a personal loan, they may end up using it for a personal emergency. This could indicate a lack of discipline and misuse of existing funds especially when they are being used for situations that are not associated with driving business growth. A business loan can make sure that entrepreneurs do not have to deal with such problems.
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