If you are running a business or want to start a business, you will need a loan for many reasons. Personal loan and business loans are two popular choices when it comes to financing the business.

If you plan to start up a new business, you can either go with a business loan or a personal loan. Both these loans are different from one another.

In some cases, a business loan might be more beneficial for you. In other cases, a personal loan might be more helpful. It mostly depends on multiple factors.

To know which loan is suitable for a start-up business, we need to understand both loan types in detail. Only after we know the pros and cons of these loans can we determine which is perfect for a start-up.

Business Loan:

It is a long which is especially given for a business purpose. You can get this loan if you want to expand your business. You can also take this loan if you need additional working capital. You can take a business loan only if you are eligible. These loans are given to business professionals and private firms. If you are self-employed or running a manufacturing or retail business, you qualify for it. You have to fulfill a lot of criteria to qualify for this loan. If you are planning to take this loan, make sure it is secured. If you are taking an unsecured loan, you have to pay more interest.

Personal Loan:

As the name goes, this loan is mostly given for any personal use. If you are facing a financial crisis, you can go for a personal loan. It is more like an emergency loan. The time duration of this loan is concise. You have to pay back the loan in a few years. These loans are unsecured. You don’t need any security to get this loan. But the downside is that you have to pay a higher rate of interest.

Personal Loan vs. Business Loan for Start-Up:

You can use business as well as a personal loan for a start-up. In some cases, the business loan will be more suitable for you, while in other cases, a personal loan will be an ideal choice.

Working:

  • Business Loan: You can use a small business loan for various purposes. If you want to buy new machinery or equipment, you can go with this loan. You will find many different types of loan options to choose from. You can either go for a short term loan or a long term loan. The only drawback is that you have to submit a lot of paperwork. You have to provide your financial statements to the bank. You can take a heavy loan if you want to acquire new land or purchase a new asset. The time duration can go up to 25 years.
  • Personal Loan: Getting a personal loan for your start-up is easier than getting a business loan. You have to provide your personal information to the bank. The bank will check your credit history and income. There is no need to keep any collateral. The period is short. But there is a huge problem with a personal loan. If you use it for your start-up and don’t pay it back, it will become a personal liability. You cannot transfer the liability to your business.

Business Loan: Pros and Cons

Pros:

  • Personal Liability: The biggest advantage of this loan for a start-up is that there will be no personal liability. If you are not able to pay back the loan, you will not be personally liable.
  • Long Term Loan: The second advantage is that you can take heavy loans for a long period. You can take a loan for a higher amount for a long time.
  • Interest Rate: This loan’s interest rate is less than a personal loan as it is secure. You have to provide collateral security for the loan.

Cons:

  • Difficult to Get: Business loans are difficult. You have to submit a lot of documents to get this loan. You need a clear credit history. It is a lengthy process. The chances of rejection are always high. You need to work hard and improve your credibility to get the loan.
  • Personal Guarantee: If your case is weak, you have to provide an additional personal guarantee. When you do this, you become liable to pay back the loan.
  • Time Consuming: It is a time-consuming process. You have to wait a long time to get approval and complete the documentation.

Personal Loan: Pros and Cons

Pros:

  • Easy to Get: These loans are straightforward to get. You don’t need a lot of documents to get it. As it is for personal use, you have to submit your income statements. You also need a good credit score.
  • No Security: Personal loans are mostly unsecured. You don’t have to provide any collateral security to get this loan.
  • Quick Process: You can obtain this loan pretty quickly. If you need urgent money for your start-up, it’s a valid choice.

Cons:

  • Low Limit: You can only apply for a lower amount of loan. Also, the period will be very less.
  • High Interest: The interest rate is high compared to a business loan.
  • No Credit Building: When you take a personal loan, you are spoiling the chances of building your start-up’s credibility.

When to Use Business Loans for Start-up?

  • If you require heavy finance, this loan is suitable as you can get a loan for a high amount.
  • If you want to keep your business assets and personal assets separate, go for a business loan. Go for a loan where no personal guaranteed is needed.
  • Take this loan for building business credit.

When to Use Personal Loan for Start-up?

  • It is suitable for start-ups as there is no need for business credit history.
  • If you need quick funds, this loan is perfect.
  • If you don’t have any business documents or security, you can choose a personal loan.

Verdict:

A personal loan is better for a start-up business. If you want money for a start-up business, then a personal loan is more suitable for you. You do have to present multiple documents or prove the business credit to get it. You will get this loan quickly without much documentation and security.

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