Personal loan for business needs: Pros and cons, interest rates, banks

“Can you use personal loan for business needs” is a common question in the minds of small businessmen and young entrepreneurs. The answer to this question is yes but the meaning of personal loan here is different.

What is a personal loan for business?

Personal loans for business are loans taken under the name of the business owner depending on his/her individual credit score. Unlike a personal loan, a personal loan for business is used for business purposes ranging from purchase of new machinery to technology upgrades.

These loans are easier to get approved because this is based on the personal credit history and the CIBIL score of the loan applicant. If you have a strong credit score, there are higher chances that you will be sanctioned a personal loan for business.

Benefits of personal loans for business

There are several benefits to applying for a personal loan for business needs:

• Fast approval and disbursal of funds

Small businesses are often in need of short-term finance that can meet their working capital needs. An instant personal loan can help solve all short-term financial requirements. Several banks offer instant approval and disbursal of personal loans because the applications are easier to inspect, and the financial institution only needs to go through a few documents to check the credit history.

• Flexible terms for fund use

Since it is a personal loan, you can use funds for other requirements along with the ones mentioned for a traditional business loan. This is especially needed for small businesses and startups to cover other expenses like business trips, repairing machinery, etc.

• No collateral

Many financial institutions lend personal loans for business needs without the need for collateral. This is because the loan amounts are typically small along with a short repayment period and is quickly disbursed.

Disadvantages personal loans for business

Here are some of the disadvantages of personal loans for businesses:

• Lower borrowing limit: Personal loans for business are offered by banks and NBFCs for short-term funding needs. Therefore, the borrowing limit of these loans is small.
• Repayment: The applicant is supposed to repay the loan in time. Any default in the loan repayment can affect your credit score.
• High interest rates: Personal loans for business typically feature high interest rates compared to a traditional business loan. This is because the former is often unsecured, which means the lender is taking more risk by lending you money.
• Short repayment period: A personal loan typically involves a shorter repayment term compared to traditional business loans. You will be required to pay back the loan in a shorter amount of time, which can be challenging for some small business owners.

Eligibility criteria

Given below are the eligibility criteria for personal loans for business:

• Age: Age of the applicant must be above 18 years
• Employment and income: The applicants should be employed with a stable source of income. He/she will be required to show proof of income, such as bank statements and tax returns. This will assess the repayment capacity of the applicant.
• Credit score: Borrowers with a minimum credit score of 650 and above have higher chances of getting the personal loan sanctioned. A higher credit score means lower credit risk for the lender.
• Financial history: A lender will assess credit reports and bank statements to inspect past loan applications and repayment history. Any defaults with respect to business loans will decrease the chances of getting loan approval. A good credit history without any defaults can improve business loan eligibility.
• Debt-to-income ratio: Lenders evaluate the applicant’s debt-to-income ratio. This means that the lender will compare the monthly EMI calculation to the monthly income to assess how easily the borrower can pay off the debt. A lower debt-to-income ratio shows that the applicant can pay off the debt easily.
• Collateral: Even though personal loans typically don’t ask for collateral; some lenders do ask for this requirement. This is to lessen the risk to the lender and also helps in offering better loan terms to the borrower.
• Business plan: Personal loans don’t ask for a business plan. However, some lenders can ask for a detailed business plan to assess the viability of the business and then judge repayment capacity.

Also read: Loan against property for businesses: Eligibility, rate of interest, documents and more

Banks that offer personal loans and their interest rates

All banks have a personal loan category. These loans can be taken for a variety of purposes including business. Have a look at a few personal loans offered by financial institutions in India:

Always apply for loans after comparing different loan products from different lenders. Look through loan policy details like fees and charges, interest rates, maximum and minimum loan amounts, collateral requirements, etc., and select the best personal loan for your business needs.

Also read: Truth behind why SMEs face business loans rejection in India

Author: Priyanka Babu

Priyanka is a seasoned content marketing professional with more than 6 years of experience crafting various forms of business and technology sector content. Her insightful writing tackles critical issues faced by small-scale manufacturing businesses. Priyanka’s clear and concise communication empowers businesses to make informed decisions and thrive in today’s dynamic business environment.