Should you take a personal loan for your business?

A personal loan is dependant on the credit profile of the individual borrower, if you already have other loans active, you may or may not be able to get a personal loan.

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If you are in urgent need of money and cannot afford to wait, a personal loan can be sanctioned within a couple of days.
By Rishi Mehra

Loans can be of different types, but the primary ones we would tackle through this article are around business and personal loans. The two loans are different and meant for different purposes, but in many cases personal loans tend to be used for business. For that reason, it is important to understand if one should do this and if yes, under what circumstances it makes sense to use a personal loan for your business.

Business loan - Business loans are of different types, ranging from short-term loans, line of credit, equipment financing, merchant cash advance amongst other. Business loans are for a specific purpose and are generally available to further a business, help in running it and to scale up. Amount available, tenure and terms and conditions of the loan are fixed based on the borrower profile and the purpose of a loan. Generally the rate of interest is competitive, but generally needs collateral as a security.


Personal loan - As the name suggests personal loans are targeted at individuals who may need money for various purposes. This can range anything from buying a gadget to getting married, personal loans offer the flexibility of using the money for any purpose by the borrower. The tenure on such loans is generally low, but the interest rate tends to be high. Generally, personal loans do not need collateral as a security, which is one reason behind its popularity.

The decision on using a personal loan for business is dependent on a number of things and therefore needs to be looked at carefully. Ideally, a business loan should be used to finance the needs of your firm, but a personal loan can also be looked at in the following cases.

Requirement is small - If the amount of money needed is relatively small, one can look at a personal loan. The application is disbursal process is generally hassle-free and it does not need the same amount of documentation that a business loan requires. If your requirement is a few lakh of rupees, it may be okay for you to take a personal loan.
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Period of time and repayment - If the need for a loan is to only get over a temporary shortfall in money, it may make sense to take a personal loan. Although, you have business loans that take care of such situations, the relative ease of getting a personal loan makes it attractive. Also, if you are sure that you will be able to repay the amount within the stipulated time or even make a pre-payment of the loan, one can opt for a personal loan for the business. Remember, the rate of interest will always be high for a personal loan, so it makes sense to repay it at the earliest.

Collateral - Personal loans are unsecured in nature, which means one of the biggest advantages of a is that you generally do not need collateral to avail it. On the other hand, business loans are almost always secure in nature, which means you have to provide collateral. If you do not have collateral as a security or do not want to provide one, personal loan is a good choice to raise money.

How soon - It takes time to get a business loan approved and for the money to finally reach your account. Business loans generally have a large number of documents that need to be submitted, from the books of accounts of a business to a business plan. It takes time to get the documents in place and then to finally get the loan sanctioned. If you are in urgent need of money and cannot afford to wait, a personal loan can be sanctioned within a couple of days. The choice between a business and personal loan depends on the urgency behind the need for funds.

Exhausted other options - Finally, if all other avenues of loan have been exhausted, taking a personal loan may be the only choice left. However, a personal loan is also dependant on the credit profile of the individual borrower. If you already have other loans active, depending on your income, you may or may not be able to get a personal loan.
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( The writer is the CEO, Wishfin.com)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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