The first thing that comes to mind when considering how to finance your entrepreneurial goals is an SBI Business loan. An established business is usually eligible for a loan, which frequently has a minimum turnover requirement. Additionally, business loans are issued after taking into account the nature of the business, the collateral offered, the loan’s purpose, etc. However, it might be challenging for a budding business owner to be approved for a loan. When looking for ways to obtain capital for your business, a personal loan is not something you should take into consideration.
Personal loans can also be used for business requirements since they are unsecured loans that you are free to use any way you see appropriate. Although the two loans are distinct and have different goals, personal loans are frequently used for commercial purposes. Because of this, it’s critical to comprehend whether doing so is a good idea and, if so, when using a personal loan for your business makes sense but first let’s get to know what business and personal loans mean.
Business loan: There are many various sorts of business loans including lines of credit, merchant cash advances, equipment finance, and short-term loans. SBI Business loan or SBI mudra loan are given for a specific purpose and typically assist a business to grow, run more smoothly, and expand. Based on the borrower profile and the intended use of the loan, the amount available, loan tenure, and terms and conditions are set. The interest rate is typically competitive, although security is typically provided by collateral.
Personal loans: They are given to people who may require money for a variety of reasons, as the name of the product suggests. Personal loans give the borrower the freedom to use the funds for whatever purpose, from getting married to purchasing new technology. Although such loans often have a short term, their interest rates are frequently hefty. Personal loans typically do not require collateral as a security, which is one of the factors contributing to their popularity.
Here are a few factors that can force businesses to choose it over credit choices.
Difficulties in obtaining a business loan: Being approved for an SBI Business loan can be difficult since banks have requirements that not all businesses can meet.
Lack of collateral: Collateral is used as security for the SBI mudra loan. Small and newly established firms may find it difficult to provide adequate collateral to
back their loan request.
Poor credit: An established or small business owner may not yet have a high credit score because it takes time to build one. They must first have a solid personal credit history and a high credit score. If time is of concern for you, it is not wise to try to get an SBI Business loan with a subpar credit score.
Low Income: Your ability to make payments is shown by your business’s cash flow. There is a greater income criterion for business loans.
Low capital expenditure: For an SBI Business loan to be approved, the business profile is essential. Due to the modest capital investment, the business profile frequently appears weak, which results in the application for a business loan being denied.
The choice to use a personal loan for business purposes depends on a lot of factors, so it must be carefully considered. The demands of your company should ideally be funded by an SBI mudra loan, but you might also consider a personal loan in the following cases:
When the financial requirement is small: If you only need a small sum of money, you might want to consider a personal loan. In general, the application and disbursal processes are straightforward, and less paperwork is needed than for a business loan. You might be able to get a personal loan if your needs are under a few lakh rupees.
Timeframe and repayment: Taking out a personal loan may make sense if you only need it to cover a short-term cash shortage. Even though you have corporate loans that can handle these circumstances, acquiring a personal loan is appealing due to how simple the application process is. Additionally, one might choose a personal loan for the business if they are confident they will be able to pay back the loan early or the whole amount when it is due. Remember that personal loans will always have high-interest rates, so it makes sense to pay them off as soon as possible.
Collateral: Because personal loans are unsecured in nature, one of their main benefits is that you typically do not need to put up any sort of security in order to obtain one. On the other hand, business loans are virtually typically secured by collateral, so you must offer that. Personal loans are a fantastic option to raise money if you don’t have any collateral or don’t want to offer any as security.
Have exhausted other options: Lastly, taking out a personal loan can be your only option if all other loan options have been exhausted. A personal loan, however, also depends on the borrower’s particular credit history. Depending on your income, you might or might not be able to receive a personal loan if you already have other debts that are in active status.
How soon you want the loan: Getting a business loan approved and waiting for the funds to actually arrive in your account both take time. A business’s books of accounts and business strategy are just a few of the many documents that must be presented in order to apply for an SBI mudra loan. It takes time to prepare the necessary paperwork before the loan may be approved. A personal loan can be approved in a few days if you have an urgent financial need and cannot wait. The decision between a personal loan and an SBI mudra loan hinges on how urgently money is required.
The criteria used by the bank to assess your eligibility is a key distinction between personal and business loans. For personal loans, lenders often examine your debt-to-income ratio and approve the loan with the least amount of paperwork. You might need to provide business plans, bank account and earnings statements, etc. while applying for business loans. Personal credit is less of a priority than commercial credit.
You can use a personal loan for anything, and you often don’t need to provide the lender with an explanation when applying for one. However, while applying for a company loan, you must provide proof of your intentions and the reasoning behind them.