Last Updated on May 21, 2021 by MoneyVisual
Finding a contributor to fund your business is no small task. One of the most common ways of financing a newly established business is to take a loan. While a business loan seems like the logical choice, it might prove more difficult than you think to get the necessary approvals.
One option that you can pursue is to take a personal loan. If you are wondering whether this is a possibility, then the answer is yes. Funds obtained through a personal loan can be used for any purpose you see fit, including business. Let’s take a look at why personal loans stand out against business loans when it comes to new ventures.
Collateral, Business Plans, and Business-Related Documents are not Required
If you have a business idea and need the funds to get it off the ground, there is a very good possibility that you won’t have a set plan for the next 5 years. While applying for a personal loan to fund your new company, you don’t have to submit any business plans. This is because you are taking the loan based on your personal financial credibility.
Whereas for a business loan, banks will ask you to submit documents like personal and business financial statements, business plans, and personal and business credit. It may not be possible for you to have all the documentation if you are just starting out. In addition, business loans require collateral, like property or manufacturing equipment. Businesses that are just starting out may not have sufficient assets to put up as collateral.
Quick and High Percentage of Approval
There can be instances where you need funds at a short notice, to make any advance payment to the vendor or put down a deposit for office space. This is where a personal loan will be helpful. More often than not, the application process is quick. Most banks will have an answer for you within a few working days. The percentage of personal loans is also on the higher side.
On the other hand, the processing of business loans takes longer because the approval criteria are quite stringent. The application process can take anywhere between 10 to 15 days, if not more. Even small business finance loans can take up to 20 days to be processed, and the approval percentage may not seem encouraging for small and new businesses.
Borrower-Friendly Repayment Structure
The repayment of personal loans generally involves paying the installment on or before a set date per month. You can plan your finances and arrange for the installment to be paid before the due date.
Some business loans require you to make weekly payments which can be difficult for newly established enterprises. It is more likely that you will end up dedicating most of your revenue towards repayment of the loan rather than focussing on business development.
Personal loans have a higher interest rate than most other financial products. But you might be eligible for a lower rate of interest if you have a good credit rating. Most banks offer different rates based on your credit score.
Business loans are generally of high value. As a start-up, your business may not require such a large sum of money. There are financial institutions that offer small business loans but they come with a high-interest rate.
Interest Paid on Unsecured Loans Can Be Deductible
Personal loans are not exempted from tax. However, if you use a part of the entire loan amount to finance your business purchases, you can claim the interest paid on the amount spent. This will help you save on the interest you pay. In order to file an eligible claim, you need to keep a detailed record of your expenses and the bills for each purchase.
Interest paid on business loans is tax-deductible. You can file a claim for the percentage of the loan amount used to invest in your business.
You may like to Read: Commercial Loans for Real Estate
All the above-mentioned points make a compelling argument to use personal loans to finance your start-up. However, there are certain conditions and drawbacks of doing so.
- The maximum amount that you can borrow with a personal loan is generally low when compared to business finance loans.
- You don’t have the necessary collateral to procure a business financing loan.
- Getting approval for a business loan helps build credibility and this increases investor confidence in your venture.
- It is easier to secure a personal loan if your business is still in the incubation period. Whereas, if your company is operational and you have the required cash flow, there is a good chance your business loan application will get approved.
- Most importantly, it is not a good idea to mix your personal and business finances for tax claims and bookkeeping. Doing so can also endanger your personal assets if your company were to face financial trouble.
- There are different types of business loans that deal with the specific requirements of enterprises. These include loans to finance the purchase of equipment, expansion of the company, payroll services, and more.
- Personal loans have a higher rate of interest than high-value business loans.
In the end, it is best to evaluate your business requirements and your repayment capabilities before making a decision. If the benefits of a personal loan outweigh those of a small business loan, it is better to opt for the solution that works best for you.
It is also important to compare different loans offered by banks to get the full picture, or you can also visit comparison sites to make an informed decision.