A business loan is a kind of loan that you can take to fund any business-related requirements. Both banks and Non-Banking Financial Companies (NBFCs) offer this kind of loan. Interestingly, unlike most other kinds of regulated borrowings, business loans can be of various types. Each type of business loan helps meet certain specific requirements related to your business.
A term loan is a kind of business loan that is ideal for long-term business financing. It is a lump sum amount that you can borrow from banks or NBFCs, and the loan amount should generally be used for a specific purpose. You will have to repay the loan over a fixed tenure, which varies depending on whether the loan is secured or unsecured. Secured term loans for businesses can typically be repaid over 15 to 20 years, while the repayment tenure for unsecured borrowings could range from 1 year to 5 years.
Startups have various distinct expenses as they attempt to establish and scale up their businesses. If you are the founder of a startup, it is possible that you have funded your initial requirements with the money brought in by investors. A startup loan can also help you meet any emergency cash flow needs or other such requirements. This is a kind of business loan that is exclusively extended to startups and young companies. In most cases, the lender will look at your personal credit profile and the startup’s financials to determine the eligibility and borrowing limit.
A working capital loan is a kind of business loan that helps you fund the day-to-day operations of your business. These operations include paying employee wages, purchasing raw materials, paying your creditors and so on. Working capital loans are generally short-term loans that help your business scale up to meet the additional demand during the peak season and deal with temporary cash flow shortages during off-season.
This kind of business credit facility is also known as invoice factoring or invoice discounting. It allows you to tide over the financial repercussions that stem from any delay in the payment of large invoices by your clients. Here, the lender will finance around 80% to 90% of the invoice amount upfront, so you have immediate cash in hand to meet the financial needs of your business. The lender will then take over the invoice and recover it from your debtors or clients.
This one’s fairly easy to decipher. It is a kind of business loan that you can avail to exclusively meet the cost of purchasing new equipment or plant and machinery for your business. In these loans, the equipment purchased is generally considered as collateral. However, you may also be expected to offer another asset or two as collateral in case the value of the machinery is insufficient.
Like individuals, businesses can also avail of loans against the property they hold. These loans are granted against property like land, commercial outlets or residential spaces that the business owns. Typically, small and medium-sized businesses tend to prefer this kind of loan. The lender generally finances around 70% to 80% of the value of the property pledged as security, and the repayment tenure for these loans can be as long as 15 to 20 years.
Many kinds of business loans are secured loans. Since you anyway need to offer up an asset as collateral to reduce the lender’s risk, you get the benefit of lower interest rates on business loans. However, keep in mind that the interest rates on an unsecured business loan will be higher.
When you borrow funds in the form of a business loan, you will have to pay back the principal and interest levied over the repayment tenure. Although the principal amount is not tax-deductible, the interest you pay on your business loan can be deducted as an expense from your total income, thus reducing your overall tax liability.
There are different kinds of business loans that you can choose from. This gives you more freedom of choice, as well as an opportunity to select a credit facility that is aligned with your financial requirements. For instance, if you wish to purchase new machinery, equipment financing may be more suitable. In case you want to cash in on your invoices now rather than later, invoice financing can help.
A personal loan is a kind of loan that you can avail to meet your own personal financial requirements. Since your personal financial needs can vary greatly, a personal loan can be used in many different ways. For instance, you could use a personal loan to finance your next international vacation (although we wouldn’t recomment that). Or, you could use it to pay off any existing high-interest debt in your portfolio - this is called debt consolidation. You could even use the funds to renovate your home or buy assets for your business.
You will generally not need to pledge any asset as a security if you are availing of a personal loan. This is because the loan is unsecured, unlike home loans or car loans. The repayment tenure for a personal loan varies from one bank to another. In most cases, the tenure ranges from 12 months to 60 months.
You do not need to pledge any asset as a security when you avail of a personal loan. So, it doesn’t matter if you have no jewellery or house property in your name. A personal loan can help you meet emergency financial needs without the burden of having to offer up collateral.
The amount borrowed via a personal loan is typically disbursed fairly quickly. Once your loan application is reviewed and approved, you can expect to find the money credited to your account within 24 hours or so. Some lenders even offer instant loan disbursals. On Fi Money, you can get instant loans on the Fi Money app - with the loan amount credited to your account within minutes.
Unlike a business loan, which is to be specifically used for the purpose of meeting the financial needs of a business, a personal loan can be used for various expenses. This degree of flexibility can be quite beneficial for borrowers, because you can use funds from the same loan to meet various personal expenses in one go.
This table should help put the differences in perspective:
Although business and personal loans are both forms of credit, they differ from each other in the purpose they are lent out for, among other things. The next time you are in need of some additional funds, give this blog a quick read so you know exactly which type of loan to apply for.
Is a personal loan ever a good idea?
Yes, a personal loan may be a good idea in many situations. For instance, if you want to pay for a large purchase, carry out a debt consolidation, meet emergency expenses or pay for your child’s higher education, a personal loan may be a great way to tackle these financial requirements without having to tap into your savings or investments. On the other hand, if you are already burdened by debt, taking on a new personal loan for discretionary spends may not be a good idea.
Can I use a personal loan as a business loan?
You can use the funds borrowed via personal loan for funding some of your business requirements. However, the converse is not true. The funds you borrow through a business loan cannot be used to meet your personal financial requirements.
Which is better: a personal loan or a business loan?
The answer to this is quite subjective. A personal loan may be a better choice if you have no collateral to offer, and if you are looking to borrow money to meet your personal financial needs. On the other hand, if you are in need of money to fund business expenses such as working capital requirements, the purchase of new equipment or the payment of salaries to your employees, a business loan is the right choice.
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