From getting a new firm off the ground to smoothly running or expanding an existing enterprise, a loan is a useful financial product for businesses of all shapes and sizes. An alternative to self-financing, applying for loans opens an extra avenue to obtain the funds required.
While there is an abundance of different loans firms can access, the two general categories products fall into are business loans and personal loans. Both options have their own pros and cons and, as a result, understanding how the two loan types differ is vital to work out which suit your needs best. Here, we discuss business loans and personal loans in greater detail to aid your assessment.
Business Loans
A popular borrowing option, the purpose of a business loan is to supply funds for an enterprise. The loan can help launch a new business, pay for expensive equipment, support growth or simply manage cash flow for firms with a fluctuating revenue. Businesses apply to borrow funds of a certain value and agree to pay them back over a fixed term in monthly repayments plus interest.
Compared to personal loans, business loans allow companies to access much larger amounts of money while interest isn’t inherently higher. However, it is assessed based on various factors including risk, loan type, creditworthiness, loan term and market conditions, among others.
Enterprises may have to offer the collateral to secure a business loan. Collateral might include land or property owned by the business or assets like high-value machinery like vehicles and equipment, or personal assets belonging to the owner of the business. This security is designed to ensure that the business loan is repaid if the business defaults on its repayments.
The application process for business loans requires detailed credit checks and evaluation of assets. Companies applying for business loans must provide their credit history and disclose any details regarding existing outstanding loans for full transparency. Lenders have set eligibility criteria that businesses must meet to receive the funding they require.
Business loans involving collateral carry the risk that if the firm fails to make repayments, it can lose its assets.
Personal Loan
Sometimes referred to as an unsecured personal loan, a personal loan is a flexible financial vehicle and can be used for almost anything an individual wants. However, while personal loans can be used for business, not every lender allows this so finding out in advance is a wise move.
Like a business loan, a personal loan has agreed interest a set term and monthly repayments that must be made until the total amount has been repaid. However, these loans are typically much smaller than business loans and usually need to be paid back sooner.
Personal loans are usually unsecured, which means that applicants don’t need to put up assets as collateral to obtain one. As no collateral is involved that needs evaluating and loans are smaller, the application process for a personal loan is often a swifter and simpler process than accessing funding through a business loan. However, business owners applying for a personal loan will still need to meet eligibility criteria and pass a credit check.
Personal loans are a lower risk option than a business loan as they aren’t secured against a person’s personal assets like their home. However, when taking out a personal loan, the applicant is personally liable and if their business cannot make repayments, their credit rating will be negatively impacted.
When to choose a business loan or personal loan
A business loan is the best finance option when you require a substantial amount for enterprise business operations. For example, if you are expanding your company or purchasing new equipment. A personal loan is better suited to obtaining funds required for personal expenses, or when you only need to acquire access to limited capital.
Are you looking for stress-free access to business finance?
At AJL Finance, we offer a wide range of financial products designed for business to access the funds they need in a fuss-free fashion. If you are interested in accessing an unsecured loan or finance secured with business assets, we can offer expert advice and assistance. Use our online eligibility checker to see how much you can borrow today.
