Personal Loan vs Business Loan: Which Is Better?

There are many instances when money will be urgently needed, for reasons that may be planned or unplanned, ranging from unfortunate events such as medical emergencies to fortunate events such as the construction of a building. For any such event, loans are easy to get in today’s market conditions. However, there are far too many options and choices available today, that may result in confusion, or in a choice of the wrong type of loan. As Celia Rees says in the Witch Child, those that can heal can harm; those that can cure can kill. When applied to loans, it can be interpreted to say that they can ultimately end up being a problem instead of help if done without appropriate learning and due diligence as the borrower.

Choosing a loan amount that is over and above our requirements, choosing a loan from a source that is not reputed, choosing a loan product that is not suited to our needs, choosing a loan and not understanding the interest rates and repayment terms are some of the most common reasons why people find themselves burdened with unplanned debt. Of course, this does not apply to borrowers with a criminal intent, who plan to borrow and never return.
The present article focuses on two particular types of loans called personal loans and business loans.

Personal loans – the ones for which you get calls from unknown numbers at all the wrong times – are those that are given to individuals with a regular, verifiable source of income. These loans are given to any person within the age range of 21 to 65 years, with different factors working in favor or against the borrower, such as the CIBIL score, a good employment history, multiple sources of income, collaterals, etc. Of course, the requirements vary depending on the lender as well as the product on offer.

Business loans – on the other hand, are not available for individuals unless they are the proprietors of businesses. In other words, business loans are strictly for businesses only and are intended to be used for improving the same business for which it is being acquired. More often than not, business loans are provided only to businesses that have shown a history of strong revenue generation and have a sound financial plan. Having fixed assets such as a building or a piece of land, or machinery and equipment will make a strong case for the business that is looking for the loans.

With that background, we can now attempt to answer the important question of which loan is better. It stands to reason that this is a question for which the answer depends on the individual scenarios and situations. While business owners can get personal loans that are not connected to their businesses, the opposite is not true. Individuals might not easily get a business loan. Therefore, the question becomes which loan is better for a business, a personal loan taken in the names of the business owners or a loan taken in the name of the business itself. Clearly, in case of a personal loan, the responsibility is completely on the individual, with no direct connection to the business.

This might be done, for example, when the business is being incorporated, and the founders are required to invest their share of the initial capital. This might also be done in case the individual intends to increase his ownership percentage in the business by infusing further capital on a personal basis.

However, since personal loans are rarely given out in the absence of collateral, there exists the risk of irrationality. The owner might end up mortgaging more than what is comfortable for the purpose of getting the loans. On the other hand, when a business loan is considered, the assets of the business are at stake and not the owner’s personal assets, depending on how the business is incorporated.

In other words, if set up correctly, the business will be able to generate loans not on the basis of who the owner is, but on the basis of how good the business has been conducted. In legal terms, the business is said to be a “legal person”, or in other words, for all purposes, the business is treated as the entity with whom the financial institutions interact, being represented by the owners or other such authorized persons. In the case of non-repayment or any unfavorable circumstances, it is the assets belonging to the business that will be looked at by the loan providers, and not the personal assets of the owners.

So, happen that getting a personal loan is faster and easier, but it might still be better to get a business loan if possible on the basis of a strong business plan.

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