When anyone runs short of money the first thing that comes to mind is the possibility of taking a personal loan but what can you use these loans for businesses? There are practically no conditions governing what you can do with a personal loan and that is something that sets them apart from other loans. A home loan can only be used to purchase or build a house, a car loan only to buy a car, but a personal loan can be used to pay off debt, invest in something or even pay for a vacation. Considering this fact, one wonders why personal loans can’t be used instead of a business loan or vice versa. The answer will become clear through these points.
Features of the two loans are different
Typically a business loan can be compared to a home or car loan because it is a loan that has been engineered keeping a specific purpose in mind and the purpose is that of providing customers with finance to run a business with. And with this profile come certain features like overdraft, ranging from Rs. 2 lakhs to Rs. 25 lakhs or more, and part payment facilities, both of which may not be available with a personal loan.
Limits on borrowing can vary
The base amount that can be borrowed with a personal loan will be a factor of the borrower’s net monthly income, credit rating, employer, etc. The limit on a personal loan varies from one bank to another but in general it can be anywhere between Rs. 4 lakhs and Rs. 15 lakhs where as a business loan can offer much more. These amounts can range from Rs. 30 lakhs to crores depending on the type of business the loan is needed for.
Repaying the loan
Another difference between how a business loan and a personal loan operate is that with a personal loan, the entire amount you request for is provided in one lump sum and repayments begin in EMI’s almost immediately. Whereas with a business loan you may be provided an amount from which you can withdraw as and when you need cash and pay back only what has been used. The interest charged on these loans can also differ by a significant amount. EMI Calculations easy with Personal loan EMI Calculator.
Personal loans affect credit ratings
One big thing with a personal loan is that they tend to have a negative effect on the CIBIL score. This means that the personal loan is going to lower your credit rating and in turn make it more difficult to get loans in the future. When it comes to financing a business, the amount involved is almost always going to be higher than what a personal loan can provide. This means that when the first loan gets over, you will be forced to take another and another, landing you in a situation where you are up to your neck in debt.
Mixing the two will cause confusion on the balance sheets
When it comes to running a company, there is definitely some accounting involved to see where you have been spending on what. If you mix a personal loan and a business loan, you won’t be able to account for the spending in a neat and clean manner and end up giving rise to multiple complicated questions about financial practices at your company.
There is just one piece of advice that can be given in this case. When you need money for personal needs, take a personal loan and when you need money for a business, take a business loan. Don’t mix the two up.
Features of the two loans are different
Typically a business loan can be compared to a home or car loan because it is a loan that has been engineered keeping a specific purpose in mind and the purpose is that of providing customers with finance to run a business with. And with this profile come certain features like overdraft, ranging from Rs. 2 lakhs to Rs. 25 lakhs or more, and part payment facilities, both of which may not be available with a personal loan.
Limits on borrowing can vary
The base amount that can be borrowed with a personal loan will be a factor of the borrower’s net monthly income, credit rating, employer, etc. The limit on a personal loan varies from one bank to another but in general it can be anywhere between Rs. 4 lakhs and Rs. 15 lakhs where as a business loan can offer much more. These amounts can range from Rs. 30 lakhs to crores depending on the type of business the loan is needed for.
Repaying the loan
Another difference between how a business loan and a personal loan operate is that with a personal loan, the entire amount you request for is provided in one lump sum and repayments begin in EMI’s almost immediately. Whereas with a business loan you may be provided an amount from which you can withdraw as and when you need cash and pay back only what has been used. The interest charged on these loans can also differ by a significant amount. EMI Calculations easy with Personal loan EMI Calculator.
Personal loans affect credit ratings
One big thing with a personal loan is that they tend to have a negative effect on the CIBIL score. This means that the personal loan is going to lower your credit rating and in turn make it more difficult to get loans in the future. When it comes to financing a business, the amount involved is almost always going to be higher than what a personal loan can provide. This means that when the first loan gets over, you will be forced to take another and another, landing you in a situation where you are up to your neck in debt.
Mixing the two will cause confusion on the balance sheets
When it comes to running a company, there is definitely some accounting involved to see where you have been spending on what. If you mix a personal loan and a business loan, you won’t be able to account for the spending in a neat and clean manner and end up giving rise to multiple complicated questions about financial practices at your company.
There is just one piece of advice that can be given in this case. When you need money for personal needs, take a personal loan and when you need money for a business, take a business loan. Don’t mix the two up.