Personal loans are the undisputed leaders of the pack when it comes to loans/funding in India. A Saral Credit report has already stated how almost 67% of the country’s population had taken these loans at least once to meet varied financial needs. Based on the survey by the firm, 36% of people took these loans for home purchases/renovation, while 9% took them for vacation and travel purposes.
Another report shows that 53% of Indian citizens got their first personal loans before turning 30, while 22% of consumers in this category were less than 25 years old. While the relevance and importance of these loans are undisputed, their flexibility is also a strong point. For example, it’s not just medical emergencies, home renovations, or vacations- you can also take them for business costs. Will this be a wise move? That’s what we look at in this article.
Issues with Getting Business Loans
Why don’t you apply for a business loan– it is often the commonest advice one hears when thinking of raising funds for business expansion, consolidation, debt repayment, working capital, inventory, and other needs. However, the reality is far from smooth in this case. Banks and financial institutions are very particular about sanctioning business loans and have stringent criteria on this count.
Here are some of the common challenges that you may have to face:
- Most banks ask for collateral which you may find hard to provide, especially if you’re a startup or a new entity.
- As a small business owner, you may not have a proper credit score. It will take time to build your personal credit score and create a decent credit history.
- Business loans sometimes have higher income requirements which may be hard to fulfill.
- Your business profile may be weak due to lower capital investment.
While these are some of the hurdles that you may face, a personal loan can be an effective solution for your business needs.
Why Choose a Personal Loan for Business Needs
Here’s why a personal loan is your best option for business funding:
Unsecured or Collateral-Free
One of the biggest benefits of these loans is that they do not require any collateral. It is ideal if you do not have collateral to pledge for raising funds.
Easier Eligibility & Application Process
Personal loans are easier to obtain than business loans. They have a simple online application procedure with minimal documentation and hassle-free processing. Business loans often require lengthy and time-consuming paperwork and procedures, which may be a deterrent for applicants.
At the same time, these loans have easier eligibility criteria, based on your credit score and income. This makes them more practical options to raise funds quickly for urgent business requirements.
Flexible Purpose
You can take a personal loan for any purpose, without having to prove the same to the lender. This makes it a flexible and convenient option, unlike business loans, where you have to demonstrate what you will use the funds for.
If you look at it closely, these loans are better choices in most cases, helping you raise funds swiftly without complicated application procedures and strict eligibility criteria. They are easier to obtain than business loans and come with manageable terms and conditions. The fact that you don’t need collateral is another plus point.
But are there any watch-outs or cons of applying for personal loans for business requirements? Let us look at some aspects below.
Things to Watch Out for While Taking a Personal Loan for Business
While personal loans have their fair share of advantages, here are some things that you should also watch out for:
Higher rates of interest-
These loans usually have higher interest rates in comparison to secured business loans. This is because they are unsecured and lenders charge a premium to cover the higher risks. It may enhance the loan cost considerably over time.
Shorter tenures-
Many lenders may offer personal loans with comparatively shorter tenures between 36-60 months on average. It may lead to a slightly expensive EMI payment every month.
Smaller amounts-
Most personal loans have comparatively smaller amounts than business loans. It may sometimes be insufficient for bigger business plans that require huge capital investments.
Now that you have an idea of both the pros and cons, it’s time to make a decision. Here’s what you need to remember before you take the final step.
What Should You Do?
You can definitely take a personal loan to meet your business requirements. It works if you do not have collateral and an established business profile. The faster and easier process will also be another advantage. Yet, keep in mind your repayment ability and also whether the maximum amount will be sufficient. These loans are fine if you need a relatively smaller amount and are okay with repaying it over a shorter tenure. Also, keep the interest rates in mind and see whether it is a more expensive option.
Larger amounts may need you to go back to the drawing board, prepare collateral, and meet all the eligibility guidelines to raise business funding. For smaller amounts, however, personal loans are undoubtedly an excellent option, provided you are okay with the rates and other modalities.
