Can Personal Loan be Used for Business Purposes?

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The exponential marketing by the financial institutions and the push given by the government, has led Business Loans being regarded as separate entities. Compared to Personal Loans they are indeed a separate entity; however, the distinguishing line isn’t as marked as we assume it to be. Collateral and procedure might well be the primary differences between the two.

A Personal Loan requires no collateral – a Business Loan does. Similarly, an individual loan involves less documentation than a business one. That’s primarily because Personal Loans are availed for a variety of reasons. Whether it’s due to a cash crunch during a family wedding, a trip abroad, extra funds for your kid’s education, and so on – some Personal Loans can be availed for many reasons. Given that an asset does not secure them makes them an even more natural mantra for money.

When it comes to Business Loans, entrepreneurs in need of capital form the customer base. While the procedure is nothing new for established entrepreneurs, those new in the arena may face considerable difficulty when they Apply for a Business Loan. This is because there are stringent eligibility tests in place which determine whether an individual is to be trusted with a Business Loan. These tests aim to assess the creditworthiness of a business, which is extremely difficult for companies in infancy and hoping to get started with that very capital.

Therefore, it’s not new for entrepreneurs to be rejected for Business Loans. It is in such situations that Personal Loans come to their respite as a rejected entrepreneur can raise the essential capital through this medium as well. If you need a Personal Loan, cash flow and credit records of an individual form the basis of evaluation for a financial institution. The business is not evaluated for sanctioning the loan, and as such, it is much easier to raise the capital.

But one cannot opt for a Personal Loan instead of a Business Loan at all times. Here are the types of situations wherein a Personal Loan can be helpful for business without any consequences:

If the business isn’t operational yet

Your business’s profitability, its creditworthiness is the most important factor that the banks consider before approving a Business Loan. To show this profitability, a comprehensive business plan is a primary requirement along with reliable cash flow. Given that new entrants may have problems establishing these factors beyond the lender’s doubts; the personal alternative is preferable to the business one.

If a small amount is required

Banks and other financial institutions show a little bias against small business loans at times. This is because they yield a lesser interest as compared to large loans while constituting the same amount of extensive paperwork. So, if it is a small capital boost that you need, a personal loan might be the best way ahead.

Insufficient collateral

Another reason for creditworthiness why many small businesses are denied Business Loans is inadequate collateral. Banks demand a guarantee against the loan they sanction for a company in case the credit turns a non-performing asset. Many small businesses may lack collateral up to the bank’s demand or any collateral at all, in which case a personal loan again comes to the rescue. Personal Loans don’t require any collateral in most cases.

Immediate requirement

Owing to the extensive documentation involved, Business Loans take considerable time to be sanctioned. The preparation of all the necessary documents, followed by their verification, is a lengthy task. Therefore, a Personal Loan would suit those with an immediate requirement of some capital better.

While these were the case in which Personal Loans are more preferable, here are the situations when it is better to opt for a Business Loan only:

If you will be able to repay quickly

Many small business owners stay away from business loans due to high-interest rates. However, if they are confident of repaying the amount soon (in case it is required to cover just the yearly expenses or get over cash flow interruptions), business loans are a great way to raise capital.

If the business has a stellar track record

In case your business is up and running, and is already showing signs of profitability with excellent assets and credits, a business loan is definitely the best way to raise any necessary funds. In addition to the capital, it also improves the business’s credit score.

Also Read: Know About the Tax Benefits Linked to Your Personal Loan

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