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Taking a business loan, is often a preferable and obvious choice for any business owner looking at business finance and credit options. However, there are times when business owners may consider availing gold loans for their business. Let us take a look at the difference between gold loan vs business loan and which one is better for your business. We’ll check the interest rates for gold loan and business loan, loan amount that can be borrowed, repayment tenure and other details for gold loan vs business loan in India. Let’s get started.
Gold loan vs Business loan – Main differences & comparison
Before deciding on which is the better option for your business, let’s first understand the meaning of gold loan and business loan and their key features.
|Features||Gold Loan||Business Loan|
|Type of loan||Secured loan or loan with collateral (e.g., gold bars, jewellery, coins)||Unsecured or collateral-free loans (note – lenders may request for a guarantor or collateral as the case may be)|
|Credit report/CIBIL||Not required as loan is offered based on the worth of gold provided as collateral||Business credit report required, in addition to bank statements, P/L and balance sheets, and individual CIBIL score|
|Tax advantage||Nil in most cases (for specific cases, tax advantage of up to ₹2 lakhs p.a. can be leveraged)||Business loan tax benefits available|
|Nature of usage||Can be used for personal purpose and business expansion||Can be used for business growth and related activities only (in some cases, lenders may request a business plan to understand how the loan amount will be invested/utilised)|
|Loan amount||Up to ₹50 lakh (some lenders offer up to ₹1.5 cr gold loan based on the valuation of the gold that can be a part of or full amount of the gold pledged)||₹50,000 – ₹75 lakhs (up to ₹1 cr offered by certain lenders based on the documents submitted and the loan amount applied for)|
|Loan interest rate||8% – 26% p.a. on an average (Low, as gold is offered as security against the loan)||10% – 24% p.a. on an average (please read more on business loan interest rates to learn about the rates offered by different lenders)|
|Loan tenure||3 – 48 months (on an average)||3-7 years on an average (can be lesser or more based on the agreement), more flexible|
|Loan repayment||Cash, fund transfer, DD, cheque
(Part pre-payment option offered by some lenders against a penalty charge though most agree to return gold pledged only on full payment)
|EMIs as scheduled (business loan foreclosure charges applicable)|
Now that we understand the key differences between gold and business loans, let’s understand their meaning and each of the components separately.
What is a gold loan?
A gold loan is a type of collateral loan or secured loan. That is, the loan is offered against gold that you offer as collateral. However, unlike business loans, in the case of gold loans, the lender does not require bank statements, credit reports or financial statements. The loan is offered based on the worth of gold and can be repaid via EMIs or cash as agreed in the loan agreement.
Gold loans can be used to meet personal expenses or for business requirements. Since the gold is offered as security to the lender, these loans often come with lower rate of interest. However, the loan amount offered is determined based on the weight and quality of gold. Lenders conduct gold valuation, to determine the percentage of gold’s value they would offer. This means that there’s difference between the actual price of gold and the loan amount offered.
What is a business loan?
A business loan is a loan offered to businesses (start-ups, SMEs and enterprises) to cater to their diverse business needs. These loans are usually categorised as unsecure business loans, i.e., loans for which the borrower does not have to pledge any collateral as security. These loans are based on the borrower’s creditworthiness and business’s financial and credit history, and usually comes with a higher rate of interest than gold loans.
Small business loans can be availed for business expansion, raw material purchase, paying rent or salaries, meeting cash crunch and daily working capital needs, or any other. These loans are usually short term business loans, offered for 3-7 years, with interest rates ranging from 10% – 24% p.a. (lender specific) based on the documents submitted. Documentation is minimum (read about the documents required for business loans) and can be availed online and offline.
Loan repayment is usually done in the form of EMI and there are consequences of not repaying on time. e.g., impact on CIBIL score. Business loans have specific eligibility criteria including minimum CIBIL score requirements (also read, how to increase your CIBIL score).
Gold loan and Business loan – Eligibility and Documentation
There are some basic eligibility requirements for business loans and gold loans that all borrowers must meet. These eligibility criteria act as a filter and reduces the lender’s risk of default. Some of the requirements and documents for gold loan vs business loan in India are:
|Gold Loan||Business Loan|
|Eligibility||Age: 21 – 60 years, Indian citizen
Type: Businesses, salaried individuals, self-employed, professionals, farmers etc.
|Age: 18 – 65 years at the time of loan maturity
CIBIL score: 650+
Business vintage: 2+ years
Annual turnover: ₹40 lakh & above
Type: All (e.g., SME, LLPs, sole proprietorship, traders, retail, self- employed etc.)
|Documents required||Address proof and Identity proof (e.g., Aadhaar card, DL, passport, voter’s card)
PAN card or Form 60
Documents on ownership of gold assets
Agri allied occupation documents (for bullet repayment for agri borrowers)
|Basic KYC documents and ID proof (e.g., Aadhaar card, DL, Voter’s ID)
PAN card (Business & personal)
Address proof (Business & personal)
Proof of business
6-12 months bank statements + P/L statement + audited balance sheets
2+ years ITR
Signed documents for any collateral/ guarantor
Lenders will also consider the business’s stability, potential, profits, loan repayment capacity and other factors before offering a business loan. Moreover, there can also be an impact on CIBIL score if business loan is rejected or if the borrow is unable to repay the loan EMI on time.
As such, when it comes to eligibility and documentation, it is easier to avail a gold loan as against a business loan.
Gold vs business loan – Loan amount, interest rates, tenure and how to calculate
Let us now look at the loan mount, interest rates offered, loan tenure on a gold loan and a business loan.
|Gold Loan||Business Loan|
|Loan amount||Up to ₹50 lakhs (though some lenders may offer up to ₹1.5 cr as the value is determined by the quality of gold asset being pledged)||₹50,000 – ₹75 lakhs (some lenders offer up to ₹1 core based on the borrower’s creditworthiness, documents submitted, CIBIL score, loan purpose and other financial statements)|
|Loan tenure||3 – 48 months (these are typically short-term loans)||3 – 7 years (these too are usually short-term loans unless otherwise specified in the business loan agreement)|
|Interest rates||8% – 26% p.a. (GST + other prevailing government charges)
Interest rate for 22k and 18k varies between lenders
Gold valuation, loan-to-value ration, gold weight, and gold price/gm taken into account
|10% – 24% p.a. approx. (check with the lender on interest rates against collateral being offered, high CIBIL score benefits, etc.)|
Gold loan vs business loan calculator
To learn about the interest amount and EMI you will have to repay, you can check the business loan EMI calculator on our website. All you need to do is add the loan amount, interest rate and loan duration and get the EMI you will have to repay on your business loan.
For example: Business loan EMI calculation
Loan amount: ₹15 lakhs, Loan tenure: 24 months, Loan interest rate: 14.5% p.a.
EMI = ₹72,374 per month
When it comes to a gold loan, you can similarly use a gold loan EMI calculator online to calculate the amount. You will have to enter the amount you need and the interest rate to know the EMI amount.
For example: Gold loan EMI calculation
Loan amount: ₹15 lakhs, Loan tenure: 24 months, Loan interest rate: 14.5% p.a.
EMI = ₹18,124 as interest per month + ₹15 lakh as lump sum (principal) at the end of the tenure.
Note: The main difference between gold and business loan EMI calculation is that when it comes to business loans, the EMI includes the interest and the principal amount. For gold loan, the EMI consists of the interest only. Also, the gold weight and rate of gold per kg is taken into account.
Gold loan or a Business loan: Which is better for your business?
We’ve reached the main question – Gold loan or a Business loan – which one should you avail for your business?
Let’s consider the benefits and demerits of both gold loans vs business loans.
· Quick disbursal (can be disbursed within hours)
· Less documentation (basic documents for gold ownership and ID, PAN card required)
· CIBIL report not required
· Lower rate of interest compared to business loans
· Asset, i.e., gold is blocked
· Requires the entire amount and interest to be paid in full to get back the gold pledged
· Higher risk as lender can sell off the gold in case of default
· Loan amount calculation is determined by multiple factors and borrowers might not get the exact loan amount required
· Unsecured loans, hence no asset/valuables pledged as security
· Flexible repayment, loan amount can be higher, and loan borrowed for a longer duration
· EMIs paid every month includes interest and principal
· Successful business loan repayment adds to building positive credit history
· Credit score and CIBIL report will be checked
· Disbursal can take up to 72 hours after business loan sanction
· More documentation as lender needs to check creditworthiness of borrower to reduce risks
To answer the question – gold loan or business loan – they both have their advantages and disadvantages. As a business owner, understand your requirements and apply for a loan. For instance, if you need funds for the next 6 months, have gold as collateral and are confident of being able to repay the amount within 6 months, a gold loan can be considered. But if your requirements are spread over the next 2-3 years, and repaying small EMIs are more convenient, then choose a business loan. Remember, in the end, funds should help you achieve your business goals. So, take the type of loan that best helps you in that direction.