If startup bug has bitten you, things could be both exciting and challenging in your case. Though you might have come up with the ideal business idea, without the proper finance option, it may not be easy to give \’wings\’ to your business. Small enterprises are often caught in a dilemma this loan option to pick.
If startup bug has bitten you, things can be both exciting and challenging for yourself. You might be tempted to use a bank loan to fund your short-term needs, nevertheless, it truly is advised to go with a business loan as an alternative to personal loan due to the following reasons:
1. Adverse affect on your borrowing ability= When you require a personal loan to fund your business, it curtails the likelihood of seeking another loan in the foreseeable future. Irrespective of the quantum, every loan that you simply take increases your debt outstanding. Sometimes it can go against you if you need to raise money to face an urgent requirement.
Here, you will need to note that financial institutions measure an individual\’s ability to repay debts by using debt-to-income ratio, which includes credit cards in the process. As a debt load above 50% can be dangerous, if you mix both personal and business loan requirements, you might cross the commencement limit.
2. Affect your credit history= Your credit track record depends on your loan and credit card usage. While, it will be positive for people with successfully serviced all your loans and pay credit-based card dues on time, it will have an adverse impact on your credit score if you do not continue with the repayment schedule.
Undeniably, business is a risky affair, it will pose problems if your capability repay loan depends on its success. Your irregular repayment schedule can lower that credit score which means financial institutions would either don\’t approve your loan in the future or charge high interest rates.
3. Loan products are different= Loan products relevant to individuals and businesses are different in relation to tenure, nature and interest. A business or commercial loan range from overdraft, cash credit, collateral loans, etc. Each product has been specifically designed to take care of the financial needs of investors of their class.
When you use an individual loan for commercial reasons, chances are you\’ll lose some benefits of independent business loans. For example, small business loans can be purchased at exciting interest rates, as well as the tenure is much longer than a personal loan if the collateral is provided.
Moreover, finance companies like Aditya Birla offer business loans for divergent requirements, like for meeting capital requirements, buying machinery, putting together the office, etc. As per your corporation requirements, you can choose the aptest loan.
4. Probability of paying high interest rates= In most of the situations, personal loans are unsecured and thus, have a high interest rate. Nevertheless, loans are available at low interest rates while using the easy repayment schedule.
5. High likelihood of misuse of funds= When you cross that little difference, which separates your business and individual finance, it can lead to abuse of funds. It could have an adverse impact on both your own personal and business finances.
6. No boost towards your business credit score= Having a sound business credit foundation needs to be your prime priority. A very good business credit score not only allows you to eligible for a larger loan amount but probably give you access to materials, equipment inventory and services that you can require without being paid up front.
However, there could be a catch 22 as you want to have some business credit worthiness to show that you can act responsibly in your business credit. If you take a personal loan for your business, you won\’t have the capacity to build your business credit score.
Many people should you prefer a personal loan to finance their business requirements, since the loan is easily available with out questions are asked on its application. With that being said, the personal loan amount that you raise can be significantly lower than the business loan, this means you will be directly related to your earning.
Also, you can certainly manage your loan book if you segregate both commercial and private loans. You can take a independent business loan as per your requirement and keep track of it.
So, now you’ve got both options- personal loan and business loan, is going on finding the right one. Even if you have made a decision to merge the both, be attentive!