By Rishi Mehra
While in an ideal situation a business should seek a business loan if it wants to raise debt from a bank, but sometimes it may prove tricky. In such a situation a simple personal loan can be prove to be very useful. So, as a business owner when should you consider taking a personal loan to fund your business?
Case for personal loan:
1) Yet to start a business - If your business is in the ideation stage or yet to start up, you will find it extremely difficult to raise money through a business loan. Banks extend loans to a company that is up and running and not mere ideas. While your business idea or the business itself may be one with a lot of potential or innovation, banks only lend money to companies with a track record. Bank loans are debt and not risk money. Hence, if you want to fund your business at the ideation stage, you may have to consider a personal loan instead.
2) No collateral/guarantor to offer - Banks generally demand collateral in lieu of the loan they will extend for a business. However, if your company is young or in the services sector, there may be no collateral to offer. Additionally, banks may also demand a credit worthy individual to act as a guarantor for your loan. If you are unable to provide a guarantor, banks will in all likelihood refuse the loan. In such a case you may have to resort to a personal loan to fund your business.
3) Loan amount is less - If the amount you need for your business is not substantial, one can think about availing a personal loan. Business loans work best if the amount is larger in nature since the procedure to avail is generally long. Business loans need a plethora of documents related to documents relating to starting up, taxes, service taxes, business model among others. A personal loan is generally hassle free and for smaller amounts it may be well worth it.
4) No questions asked about the money - Business loans come with strings attached. Business loans are extended based on the utilization plan for the money. If the bank feels your business plan is sketchy, the loan will be rejected. On the other hand personal loans are extended for any purpose and no questions are asked about how the borrower will utilize it. In such a case, if your business plan is vague, but you still want to take the risk, personal loan should be able to help you out.
When a business loan makes sense
1) If you qualify under CGTMSE -If as a Micro and Small Enterprises you qualify for the Credit Guarantee Scheme (CGS), business loans is the best option to go for. Under the scheme a business can get collateral free loans up to Rs.1 crore. The money can be used as cash credit for meeting working capital finance requirement or as term loans for the purchase of commercial assets and business expansion needs
2) Business has a good credit rating - If you are already a business that is up-and-running and has been a part of the institutional finance channel, the chances are your business will have a credit rating. If the credit rating of your business is good, getting a favorable business loan will not be difficult. Business loans generally carry a lesser interest rate when compared to a personal loan and longer tenures. Also, if your business has an existing relationship with a bank, approaching it for a business loan is a lot easier.
4) If you already have existing loans as individual - A personal loan is extended based on your credit profile. If you are already servicing loans from banks or unpaid credit card dues, raising another personal loan will be very difficult. If your personal debt- to- income ratio is high, it is better to opt for a business loan.
(The author is co-founder deal4loans.com, which is a platform for online comparison for retail loans in India. Views expressed are personal)
While in an ideal situation a business should seek a business loan if it wants to raise debt from a bank, but sometimes it may prove tricky. In such a situation a simple personal loan can be prove to be very useful. So, as a business owner when should you consider taking a personal loan to fund your business?
Case for personal loan:
1) Yet to start a business - If your business is in the ideation stage or yet to start up, you will find it extremely difficult to raise money through a business loan. Banks extend loans to a company that is up and running and not mere ideas. While your business idea or the business itself may be one with a lot of potential or innovation, banks only lend money to companies with a track record. Bank loans are debt and not risk money. Hence, if you want to fund your business at the ideation stage, you may have to consider a personal loan instead.
2) No collateral/guarantor to offer - Banks generally demand collateral in lieu of the loan they will extend for a business. However, if your company is young or in the services sector, there may be no collateral to offer. Additionally, banks may also demand a credit worthy individual to act as a guarantor for your loan. If you are unable to provide a guarantor, banks will in all likelihood refuse the loan. In such a case you may have to resort to a personal loan to fund your business.
3) Loan amount is less - If the amount you need for your business is not substantial, one can think about availing a personal loan. Business loans work best if the amount is larger in nature since the procedure to avail is generally long. Business loans need a plethora of documents related to documents relating to starting up, taxes, service taxes, business model among others. A personal loan is generally hassle free and for smaller amounts it may be well worth it.
4) No questions asked about the money - Business loans come with strings attached. Business loans are extended based on the utilization plan for the money. If the bank feels your business plan is sketchy, the loan will be rejected. On the other hand personal loans are extended for any purpose and no questions are asked about how the borrower will utilize it. In such a case, if your business plan is vague, but you still want to take the risk, personal loan should be able to help you out.
When a business loan makes sense
1) If you qualify under CGTMSE -If as a Micro and Small Enterprises you qualify for the Credit Guarantee Scheme (CGS), business loans is the best option to go for. Under the scheme a business can get collateral free loans up to Rs.1 crore. The money can be used as cash credit for meeting working capital finance requirement or as term loans for the purchase of commercial assets and business expansion needs
2) Business has a good credit rating - If you are already a business that is up-and-running and has been a part of the institutional finance channel, the chances are your business will have a credit rating. If the credit rating of your business is good, getting a favorable business loan will not be difficult. Business loans generally carry a lesser interest rate when compared to a personal loan and longer tenures. Also, if your business has an existing relationship with a bank, approaching it for a business loan is a lot easier.
4) If you already have existing loans as individual - A personal loan is extended based on your credit profile. If you are already servicing loans from banks or unpaid credit card dues, raising another personal loan will be very difficult. If your personal debt- to- income ratio is high, it is better to opt for a business loan.
(The author is co-founder deal4loans.com, which is a platform for online comparison for retail loans in India. Views expressed are personal)
