Is it Wise to Take a Personal Loan to Fund your Business?

• Posted by Aditya Sehgal August 13, 2018 - Filed in Business - #Personal Loan  #CIBIL Score  #Interest Rate on Personal Loan  #Unsecured Loan  - 394 views

  For businesses, banks and NBFCs in India provide various loan options that can cater to every kind of requirement. Secured and unsecured, both types of loans are available to business owners which they can avail as per convenience.

   

  Personal Loans, business loans, and loan against property are some of the popular types of financing available to self-employed individuals.

   

  Sometimes, business owners opt for a Personal Loan to invest in their company. Owing to its unrestricted use, they consider it as a viable option when looking for additional funds.

  

  When are Personal Loans for businesses a wise option?

   

  Business owners may have various reasons to opt for Personal Loans. Some of these include:

   

  1) When a business owner has no asset to provide as collateral

   

  Loan against property (LAP) is one of the financing options that can be availed by business owners against collateral. They have to pledge an asset to the bank or NBFC against which the loan will be sanctioned.

   

  Being secured, LAPs come with high financing, low interest rates, and longer tenures.
  However, in case of default, a customer will lose the collateral. The lender will seize the asset and liquidate it to recover the damages.

   

  For business owners who don’t have an asset for collateral or can’t risk losing one in case of default, a Personal Loan is a right alternative.

   

  Personal Loans are unsecured and thus, are collateral-free. Business owners require a good credit score as mentioned above for sanctioning such a loan. Plus, they can use a Personal Loan EMI calculator to efficiently estimate their EMI payment based on tenure and preference.

   

  2) When they meet the eligibility criteria

   

  The Personal Loan eligibility set forth by NBFCs is also less stringent compared to banks. 

  • Self-employed individuals have to fulfill the following eligibility criteria to avail such a loan: 
  • They must be between the ages of 22 and 55 years.
  • They should have a business vintage of at least 3 years.
  • Self-employed individuals need to audit their previous year’s turnover by a CA.
  • They also need to file an income tax return for at least the previous 1 year.

   

  3) When one has the option to use the loan for various purposes

   

  Personal Loans for businesses are multi-purpose loans that don’t require the borrowers to use them for specific purposes.

   

  These advances can attend to numerous monetary requirements like business expansion, purchasing plant & machinery, buying equipment, consolidating debts, and others. Hence, when individuals face a Liquidity crisis in a business, availing a Personal Loan may come to the rescue.

   

  4) When the loan amount they seek is small

   

  Banks and NBFCs provide Personal Loans up to Rs. 25 lakh; compared to LAPs, this amount is minuscule. 

   

  However, for new or small businesses, availing a LAP can be problematic owing to the reasons mentioned before.

   

  When the amount required remains within the Rs. 25 lakh limit, then opting for Personal Loans can prove to be more beneficial than a LAP.

   

  Furthermore, Personal Loan interest rates are also higher compared to that of LAP. However, owing to longer tenures, the total interest paid with a LAP can become higher when compared to Personal Loans.

   

  5) When they are looking to start a new business

   

  A credit score is one of the crucial parameters that banks and NBFCs check when providing Personal Loans. Applicants need to hold a credit score of 750 or above to avail such loans.

   

  Hence, those who have such a credit score and are looking to start a new business can easily apply for Personal Loan. However, they may need to make a compelling business pitch that convinces the lender.

   

  Ensuring that the business will be able to turn the investment into profit will help an entrepreneur secure such a loan.

   

  For the following scenarios mentioned above, one can avail a Personal Loan for one’s business. Whether it is growth or starting a business, finding the right Personal Loan can help business owners massively. With an EMI calculator, one can even plan out one’s repayment quickly and easily without any hassle.