Financing Your Business With a Loan? Here's What You Need to Know

Do you need funds for your business? You could take a loan or raise funds by selling company shares. But if you choose to take a loan, you would be spoilt for choice either You could opt for a business loan or could avail a Personal Loan to finance your business. Let’s look at the things to consider when financing your business with a Personal Loan:

Mixing Business and Personal Finances:

They say you should never mix business with personal matters. This is especially true when it comes to finances. If you do need to mix the two, tread carefully.

Say, you take a Personal Loan of Rs.5 lakh to buy raw materials for a business order. You complete the order on time and ship the products. But for some reason, the customer delays the payment. Now, suppose your business does not have enough liquidity. Then you might end up missing your loan repayments. Delaying on equated monthly instalments (EMIs) would attract penalties. If you default on your loan, you might even lose the collateral asset.

If you have a business partner, you might have some wiggle room. You could get a Personal Loan using your partner’s credentials and pay off your Personal Loan. Thus, you buy time to pay off your partner’s Personal Loan using the business’ profits. But having a partner has its own set of problems. For example, instead of letting you pay your Personal Loan EMI, your partner might withdraw all the profit from your business account, leaving you penniless. While this is a remote possibility, you may then see yourself repaying the Personal Loan all by yourself, without any help from the business.

Round 1:

Personal Loan: 0
Business Loan: 1 

Good, Fast Money:

Everyone is in a hurry to earn money and fast money could be dangerous. However, Personal Loans could be an exception here. You can get a Personal Loan rather quickly. So, it could be considered as fast money. But without the money, you could lose out on a big opportunity. Personal Loans can trump business loans in such a scenario. The processing and approval time of Personal Loans is lower. That is partly because you do not need to show proof of usage. For business loans, you might need to explain how you will use the money. This could slow down the loan processing.

Round two:

Personal Loan: 1
Business Loan: 1

No Credit History? No Problem

What determines the business loan amount and interest rate available to your business? One crucial factor is your business’s credit history. A good credit history is essential. It confirms your repayment capacity and your financial track record. If you do not have a good credit history, lenders may be reluctant to give you a loan. Things are a bit different if you avail a Personal Loan. In this case, lenders will verify your personal credit history. However, at times, lenders provide smaller Personal Loans without checking your credit history. But this is solely at their discretion. Thus, Personal Loans are ideal for business owners with young businesses.

Round Three:

Personal Loan: 2
Business Loan: 1 

Business Assets Aren’t at Stake

Most business loans do not need collateral or a guarantor. But should you default on the loan, your company assets might be at stake. This applies if you have taken certain types of loans, like a machinery loan. This might not be the case with Personal Loans. Also, a young business might have no assets to offer as collateral. Even if you do, you would not want to risk putting those assets on the line. If the lender takes over your assets, you could face delays in your operations. This could hurt your profits.

Round Four:

Personal Loan: 3
Business Loan: 1

Good for Small Business Requirements:

Personal Loans are useful when your business needs are small. If your business needs a bigger loan, a business loan might be a better option. These provide higher loan amounts. For example, Bajaj Finserv offers Personal Loans of up to Rs.25 lakh. But you could get a business loan of up to Rs.30 lakh. The extra Rs.5 lakh could mean an upgrade for your machinery. In fact, Bajaj Finserv offers the option of a flexi loan as well. This provides you with a line of credit that you can use as and when you need it. Click <here> to know more about flexi loans.

Round Five:

Personal Loan: 3
Business Loan: 2

Conclusion

A business does not need to suffer because of insufficient funds. After all, there are so many ways to infuse funds into your business. If you cannot get a business loan for some reason, a Personal Loan could help. So, assess your options using the above pointers. Decide which loan best suits your needs.