Starting A Business – How is a Business Loan Different from a Personal Loan?

Getting a loan to kickstart a new business or to help expand an existing one is a common scenario. Businesses depend heavily on financial assistance or external funding instead of relying on profit alone to keep a business running, let alone to start one.

With that said, fortunately, there are a large pool of loans for you to choose from. The two types of loans that stand out to fit your business needs would be either a business loan or a personal loan. However, both work very differently.

Unsure of which one will best suit and provide better value to help you finance your business? Let’s find out how is a business loan different from a personal loan!

 

Hello Business Loan!

 

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First stop: a brief intro to what exactly is a business loan. It’s basically a form of financing that’s specifically intended for business purposes, and you can repay with added interest. Under the umbrella of business loans, there are term loans, invoice financing, microloans, merchant cash advances, asset-based financing and more.

From a quick glance, a business loan might look like the obvious choice. But, wait! Here are the pros and cons of a business loan for you to consider.

 

PROS

 

1. Lower Interest Rates

The average rates for a business loan offered by banks and supporting bodies are generally no more than a maximum of 5%. Personal loans would usually have interest rates ranging from 5%  to 24%. The low interest rate is highly beneficial in instances where your business requires a large sum of money.

The ability to significantly reduce your interest cost may present a strong case here. However, the catch is, not all applications are guaranteed to come with low rates as it depends on the financial strength of your business to determine the eligibility rates.

 

2. Revolving Credit or Overdraft Facilities

Revolving credit essentially is a line of credit where the customer pays a commitment fee to the bank/financial institution in order to borrow money. It’s a form of flexible financing that can help to support a business until the debt is paid up. The contract allows the individual to borrow, repay, and redraw a loan until the contract period is over.

Similarly, an overdraft is a form of facility that finances your short-term cash needs such as to increase cash flow or to buy new stocks, for instance. It is intended to tide a company over temporarily.

 

3. Financial Assistance Schemes

Under the recently announced Budget 2019, the government is seemingly keen on supporting businesses with the Business Loan Guarantee Scheme. On top of this, there are a few other institutions that provide the same form of financial assistance with affordable interest rates for a higher amount of money.

These financial assistance schemes are not under banks and are established to help grow local businesses. Check out some of the available schemes in our previous article here.  

 

CONS

 

1. Meeting Eligibility Requirements

The main stumbling block when applying for a business loan is due to not meeting the requirements. The nature of business plays an important role for business loans. The financing purpose also determines whether or not the loan is approved.

Some business loans are set with requirements such as a specific time period on the company’s establishment (e.g. at least 2 years of operation), minimum annual earnings, and having Bumiputera shareholders.

Other than that, to get a loan approval, you will need to disclose in detail via documentation regarding your business plan, cash flow, tax and return, and annual report.  Hence, the limitation is largely due to the inability to meet these requirements for businesses.

 

2. May Require Collateral

Certain business loans may require collaterals where you are at a risk of losing the promised collateral if you default on your loan. This is especially the case for business loans of larger sums but with minimum interest rate.

 

3. Shorter Loan Tenure

With most business loans’ tenure ranging between a maximum of 5 to 7 years, there is always a chance that you might get stuck with higher monthly repayments within the short time period. Additionally, the amount of financing that you’ll be eligible for might be reduced as well if you already have other financial commitments tied to your business.

 

Hi Personal Loan!

 

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To start off, a personal loan from any bank or other financial institution can legally be used for business purposes. Next, a personal loan works differently from a business loan in the sense that it depends on your personal credit score or financial history, rather than your business performance.

With that established, it is time to weigh in the pros and cons of applying for a personal loan to finance your business.

 

PROS

 

1. Easy To Apply

When it comes to a personal loan, the two things that you should be concerned with are firstly your personal credit history and secondly, your personal income. If your credit history is strong (no overdue payment or bad debt repayment record) and your personal income surpasses the required minimum, you can expect an almost instant approval.

 

2. Fast Approval

The best part of applying for a personal loan is the fast approval. It could take only a few days to be approved, if not an on-the-spot approval. Therefore, if your business is in need of quick cash, a personal loan could be the preferred choice. A business loan on the other hand, might take more time, sometimes ranging from a few weeks or even months for approval.

 

3. Good Choice For Startups

A personal loan is usually more favoured by startup businesses and sole proprietors. Their business capital is much lower hence the amount offered under a personal loan is sufficient enough to kickstart their business.

Not to mention, you can choose to start your business at a later date, but still have your loan approved. This is because the requirement for your business to be in operation first doesn’t apply under a personal loan.

 

CONS

 

1. Lower Loan Amount

This is when the personal loan stays true to its name as most banks and financial institutitions limit these kind of loans to only within the hundred thousands of Ringgits. In comparison, business loans are able to lend out a loan amount exceeding the one million mark and higher, depending on requirements.

 

2. Higher Interest Rates

Again, as mentioned earlier, a personal loan generally has a higher interest rate as compared to a business loan where some can go as high as 24% per annum. This is to compensate for a longer loan tenure but not exceeding a maximum of 10 years.

 

3. Unsecured Loan

A personal loan is an unsecured form of loan which explains why there is no compulsory requirement to put up any asset for collateral. Although you won’t lose any asset, you risk damaging your personal credit score if you default on payments. If this happens, it might cause difficulties for you in acquiring any other loans in future.

 

So, Which One To Choose?

 

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The answer to this question is never straightforward. In order to come up with the right choice, you need to factor in what drives you to apply for a loan in the first place. Once you are clear with your priority, consider these pointers that we would like to highlight.

Get a business loan if:

  • Your business is already in operation for a number of years.
  • Your business needs a large loan amount.
  • You can wait a month or two for your loan approval.
  • You do not mind putting up assets as collateral.

Get a personal loan if:

  • You are starting up a new business.
  • You do not need a large sum of loan.
  • You need the money fast.
  • You make a sizeable personal income.
  • You do not want to go through the hassle of presenting your business documentation.

 

If you’re still on the fence, why not check out Loanstreet’s handy personal loan comparison tool? It not only allows you to quickly compare and choose a wide variety of loans available in Malaysia, you can also use the calculator available to check for the indicative monthly repayments!

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