You can be a business man planning to expand his business or you can be someone who needs funds to buy machinery or gadgets for their business, whosoever you are, it is important to understand the best way to finance your small business. Business loan is an instant option that will come to your mind for financing your business, but many entrepreneurs feel that a personal loan can also be an ideal choice for it.
Before you make a decision, it is important to understand the difference between a personal loan and a business loan and which one would prove to be better for your small business in the future.
What is a Small Business Loan?
A small business loan is designed to offer cash flow to small businesses so that they can grow and are able to manage all the expenses even if the organization is not earning desirable profit. A lot of small business loan options are available in the market that offer loan amount upto Rs. 50 lakh. These loans are designed to help businesses deal with financial difficulties through desirable funds.
A small business loan is an ideal option for those who prefer not to mix their personal and professional expenses. When you opt for a business loan, you not only stop mixing your personal account and company’s funds but also stop your personal savings from getting used for a business purpose.
Eligibility Criteria to Avail a Small Business Loan
If you wish to opt for a business loan, you need to meet the following eligibility criteria:
- You should be a self- employed individual/professional, retailer, manufacturer, service provider or a trader.
- Your minimum age should be 21 years.
- Your maximum age should be 65 years at the time of loan maturity.
- Your minimum turnover should be Rs. 40 lakh.
- You should be in your current business for minimum 3 years along with 5 years of business experience in total.
- Your minimum profit earned should be Rs. 1.5 lakh.
Documents Required for a Small Business Loan
Availing a business loan requires business proofs and other documents. Here is the list:
- Last 3 years Income Taxstatements
- Bank account statements
- Business proof
- Practise certificate (if any)
- Proof of ownership of the possessions which are used for business purposes
- Your recent photographs
- Identity proofs such as Aadhar Card, Voter ID Card, PAN Card
- Residence proof such as Passport, Aadhaar Card, Voter ID Card
- KYC documents of a co-applicant (if any)
- Other Documents: Certified Copy of Partnership Deed, Certified copy of Memorandum of Association and Articles of Association.
Note: The list may vary from lender to lender or the lender might ask you to submit some additional documents.
Interest Rate of a Small Business Loan
The interest rate of a small business loan starts from 14% and goes up till 24% depending on an individual’s eligibility.
Advantages of a Small Business Loan
Small business loan comes with its own set of advantages and they are:
- Separates the finances: If you opt for a business loan, you separate your personal finance from the business one. This way, you not only save your personal savings but also save a lot of money in the form of tax deduction.
- Quick application process: Gone are the days when you had to go to the bank to apply for a business loan. Today, you can apply for a business loan online from the comfort of your home and get the approval within a few working days.
- Collateral free loan: Unlike a house loan or a car loan, a business loan is a collateral free loan. Hence, you do not need to pledge any personal or business assets to avail funds.
- Helps build business credit: Opting for a business loan and repaying it on time helps in building your business credit and ensures the lenders that you will repay in time if you opt for a loan again.
- Large loan amounts: You can opt for a larger loan amount that varies from Rs. 5 lakh to Rs. 50 lakh if you apply for a business loan. This amount can be availed as per your business requirement and helps you to deal with the financial emergency without any hassle.
- Flexible tenure: A small business loan usually varies from a month to 3 years, thus, it can be repaid within a shorter tenure as per your financial stability.
What is a Personal Loan?
A personal loan is an unsecured loan that has a flexible end use and can be availed by an individual to meet personal as well as business needs. A personal loan is an easy to avail loan and can help a businessman to face financial crises without any inconvenience and save the business from bearing financial losses. This loan can be availed from Rs. 10,000 to Rs. 25 lakh and is disbursed to your account within 3-5 working days.
Eligibility Criteria to Avail a Personal Loan
The most common eligibility criteria to avail a personal loan are as follows:
- You should be a resident of India.
- You should be a self- employed individual.
- Your minimum age should be 21 years.
- Your maximum age at the time of loan maturity should be 65 years.
- Your minimum turnover should be Rs. 1 lakh.
- Your current business should be running for atleast 3 years with an experience of total 5 years.
Documents Required for a Personal Loan
- KYC Documents: Proof of identity, address proof, DOB proof.
- Proof of Residence: Leave and License Agreement / Utility Bill (not more than 3 months old) / Passport (any one).
- Income proof (audited financials for the last two years).
- Latest 6 months bank statement.
- Office address proof.
- Proof of residence or office ownership.
- Proof of continuity of business.
Interest Rate of a Personal Loan
The interest rate of a personal loan starts from 10.99% and varies from bank to bank. The interest rate of an individual is finalized after considering various factors like his age, credit score, employer, repayment ability, etc.
Advantages of a Personal Loan
Personal loan offers many advantages to an individual and they are:
- Flexible end use: You might opt for a personal loan to deal with your business expenses but you will not be restricted to use it for a particular purpose as unlike a home loan or a car loan a personal loan has no end use. You can use a personal loan to deal with other personal expenses too like home renovation, medical emergency, purchase of a household item, etc.
- Quick application and disbursal: A personal loan can be conveniently applied online from the comfort of your home or office and the amount can be disbursed to your account within 3 to 5 working days.
- Minimum documentation: The complete process to apply for a personal loan takes place online and requires uploading of minimum documentation to process the application.
- Flexible tenure: Ranging from 1 to 5 years, the flexible tenure options offered by personal loan allow you to repay as per your repayment ability.
Both a personal loan and a business loan have their own set of advantages. The prime motive is to deal with all the business expenses without facing any losses. If you opt for a business loan, you will get more funds in hand as compared to a personal loan. Therefore, if you have a huge setup and require more funds, opt for a business loan and if you require lesser funding, personal loan can be the right choice.
Hence, you should analyse both types of loans as per your business requirement and choose wisely according to the loan amount you need, interest rate that you can afford and tenure that you can manage.