Should I apply for personal or business finance to start or expand my business? Business loan vs personal loan is a much-debated subject. And, in this article, we will analyse the differences between the two.
Business finance at a glance
Business finance offers funds to organisations to manage their operating costs, equipment procurement activities and other financial obligations. It is a great option if you are an entrepreneur who doesn’t want to mix their personal and professional finances. Check out some of the features of a business loan:
- Availing business finance largely depends upon the size, type, and state of your business. It also relies upon the capacity of the lender.
- Business finance offers flexible tenures with comfortable repayments.
- Business finance may require more documents than personal loans for scrutiny owing to a larger sum being sanctioned.
- The interest paid on business finance is eligible for a tax deduction.
- Business finance may or may not be secured, meaning you may or may not need to pledge a guarantee or collateral. Pledging a guarantee depends on the loan amount, the purpose of the loan, and your lender’s policies.
Additional Read: When You Need to Opt for Business Loan
Personal loans at a glance
A personal loan is an unsecured credit that can be used for multiple end-purposes, including higher education, medical emergencies, vacations, elaborate weddings, etc. Here are some features of a personal loan:
- A personal loan is collateral-free.
- The maximum amount you can receive on a personal loan is usually lesser than business finance.
- There are no tax benefits on personal loans.
- Personal loans have a low processing time and require minimal documentation.
- While there is some flexibility, personal loans generally have a shorter loan tenure.
Difference between personal loan and business loan
There are many advantages to both business and personal loans. Which loan to choose depends on several factors such as the extent of urgency, the end-purpose of the loan amount, documents available, credit score, etc.
Business loan can offer higher credit if needed. The eligibility for this loan type depends on many factors, such as:
- whether the business is an SME, MSME or a large company
- The purpose of the loan
- The balance sheet, etc.
Business finance offers a tax benefit to the beneficiary. The interest paid on this loan type is tax exempted. Personal loans do not offer a tax benefit.
Additional Read: Tax Benefits on Business Loan
Defaulting on a personal loan can affect one’s credit score. This may also affect the individual’s eligibility for future loan(s). Defaulting on business finance will affect your credit score only if you are the sole proprietor.
Documentation and processing time
In some instances, the average processing time of business finance may be higher than that of personal loans. That is because large business finance amounts require more documentation like ITR, Balance sheets, proof of ownership, etc.
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