Why Should You Go for A Business Loan And (Not A Personal Loan) For Your Business?

Introduction

From running a business smoothly to planning further expansion, it requires funds. Business owners also have to make sure that they make the right strategic moves to stay at the top of the game but sometimes, they may not have enough funds to execute their plans. To help business owners in such situations, financial institutions offer Business Loans, which are designed to meet the financial needs of entrepreneurs and businesspersons. While there are different types of secured and unsecured loans available, here are some reasons why business loans are the best match for financial needs of your business and where all you can use it to boost revenue.  
 

Advantages of Business Loan

 

• Higher Loan Amounts

  Lenders understand the huge financial needs of business owners and therefore, business loans are designed with higher borrowing limit, something the personal loans will not provide. Moreover, business loans keep your business and personal finances separate and do not put any liability on your personal assets. For example, if you apply for a personal loan, a lender might only provide you with a fund up to Rs 5 lakhs based on your credit profile. This amount will, however, not suffice for your business’ needs, such as the purchase of heavy equipment. On the other hand, the same lender can offer you a collateral-free business loan of up to Rs 25 lakh based on the business’ potential and its past financial records. With such a hefty sum, you can pay your raw material suppliers, buy advanced equipment, hire people, cover operational expenses, and pay for a few other things required to grow the business.
   
  Thus, while evaluating business loans vs personal loans in the context of the loan amount, the former is better.
   

• Flexible Tenures

  Both personal and business loans come with a flexible repayment tenure. It means that you, not your lender, determine the repayment period. The lender allows you to evaluate your budget, understand your affordability, and then decide how many years will take to pay off your debts. Now, you must be wondering what is the difference between a personal loan and a business loan in this case. 
   
  Personal loans are available with repayment terms of up to five years. In contrast, the repayment period for a business loan varies depending on the business financing option. For example, in the case of term and working capital loans, it is 36 months. However, if you choose equipment financing, the repayment period is significantly longer. This offers business owners the freedom to pursue growth and expansion of their business over a longer period instead of worrying about their finances.

 

• Build Financial Credibility

  Opting for a business loan helps build the financial credibility of your company, which is difficult if you opt for a personal loan as the latter does not affect the business credit score. Moreover, when lenders see a business owner investing in the growth of the company, it helps in building the reputation of the company as a growth-oriented one. Financial credibility opens doors for other and bigger opportunities. Moreover, when the loan amount repaid, it builds the business creditworthiness of the company.
   

• Customised loan products

  There are several types of business loans available, each tailored to your specific business needs. Some of the most common business loans are working capital loans, term loans, medical equipment financing, etc. Let us take a closer look at each of these business loan options.

 

• Working capital loan: 

  This is a secured type of financing designed to cover both short and long-term operational expenses. The fund is available for a maximum amount of Rs 5 crores with a three-year repayment period. The loan to value is determined by the underlying assets of your company.
   

• Term loan

  This is the most widely used business loan in India and can be used to cover any of your business needs. The loan is available for the maximum value of up to Rs 25 lakh with a 36 month repayment tenure. The lender does not require any collateral to approve this loan.
   

• Equipment financing:

  Equipment financing loans can be utilised by businesses like private medical practitioners to purchase advanced machinery, such as X-Ray machines, dialysis machines, dental chairs, etc. Most financial institutions offer this loan for amounts starting from Rs 10 lakh, with a maximum repayment period of seven years. The interest rate starts at 11%, depending on your credit profile and the equipment required.
   
  Personal loans do not offer customised loan products with varying interest rates and loan amounts and are, thus, less suitable for specialised business purposes.
   

Also Read: Get An Equipment Loan With These Five Easy Steps

What Purposes a Business Loan Can Help You Fulfil?

 

1. Expansion Plans

   A business owner thinks of expanding operations when the company is making decent profits and its future prospects look quite promising. Therefore, if you want to open another branch in another city, or upgrade the existing infrastructure to lead your company to the next chapter of growth, business loans will help you buy office space to expand your operations. With right planning and execution, the revenue you will earn from scaling up your operations would be much more than the interest amount you would pay for a business loan.

 

1. Buy Equipment or Inventory

   With technology, machines that are more sophisticated are being created that are lowering manufacturing cost while increasing productivity. It is a solid investment to stay ahead of the competition. You can apply for a business loan to purchase new equipment and replace the old and worn out ones.

 

1. Fulfil a Large Order

   You will require additional funds if you suddenly get a large order. No business owner would want to let go an opportunity to produce something at a large scale and earn not just more revenue, but also a loyal customer. However, taking a large order means you have to ramp up production by buying more raw material and hiring more workers to meet the deadline. All this would need a handsome amount of money, which you can get via a business loan.

 

1. Invest in Human Resource

   As a company grows, it becomes important to hire more staff. Hiring a healthy number of quality professionals, who can increase the output with existing infrastructure, requires a significant monetary investment. If your current revenue is not proving to be sufficient to increase manpower in your business, you can opt for a business loan.

 

1. Gain Working Capital

   Every enterprise needs sufficient capital to keep running the daily operations. But the cash flow does not always stay steady and accumulative cost of paying for rent and taxes, purchasing inventory, clearing payment to suppliers, giving salary to staff becomes too big an expense to be paid from savings. A business owner relies on healthy cash flow to be able to pay these expenses and maintain continuity of operations. But when the cash flow is irregular due to a lean phase or delayed invoice clearance, one can use business loans to deal with such temporary financial situations.

 

1. Build Credit Score

   On successful repayment of your business loan, you will see your business credit score rise significantly. This improved credit profile will give you a reputation of a trustworthy borrower and will make you eligible for higher loan amounts at better terms and conditions.

Also Read: STEP BY STEP GUIDE FOR CHECKING YOUR CREDIT SCORE
 

Conclusion

Lenders, today, understand the ambitions of new-age business owners and realise their potential for growth. Therefore, from application to documentation and verification, the process of getting a business loan has got easier and quicker. With so many options available, experts suggest that business owners do some research, evaluate their requirement, check the eligibility criteria, and apply for a suitable loan that can be most advantageous to their business.
 
Disclaimer: This post was first published on 19th September 2019 and has been updated for the latest information, freshness, and accuracy.