For an entrepreneur or an organization, whether it is an SME or an MSME, it is a challenging process to grow a business with a motive to earn Profit. It brings a lot of satisfaction to independent businessmen and organizations to successfully manage their day-to-day expenses and to make a difference in society by doing some social work. But a huge amount of Capital is required to cater to daily expenses and buy relevant equipment or stock to run the business.
He may require a loan – whether a small business loan or a personal loan to full his organizational needs.
An entrepreneur needs funds to focus on the following points to manage a business:
- A business plan, expenses on research, and Borrowing Costs
- Insurance, License, and Permit Fees, Expenses on Equipment and Supplies and Technological Expenses
- Employee Expenses, capital required for Advertising and Promotion
- Costs for marketing and customer service
To get the best deal on personal and business loans, you need to:
- Compare Business Loan Interest Rates – Minimum rate of interest on a business loan starts at around 13.50%.
- Processing fees – The minimum processing fees could vary between 2% to 3% on loans
- Insurance premium – Since these loans are unsecured, it is advisable to take an insurance policy like life and accidental insurance by the name of the borrower when availing of a loan.
- Prepayment and foreclosure – In case of surplus funds, the borrower may think of making a pre-payment or foreclosing the loan. A few loans could be charge-free and many institutions may charge up to 5% as foreclosure charges.
What is a Small Business Loan?
A small business loan is offered by many banks and financial institutions and the loan amount can be availed up to Rs. 2 crores. It is a perfect option for people who don’t want to mix business with personal expenses, and this can easily be used for multiple purposes.
Small Business Loan- Features and Benefits
The application process of a business loan is quick and easy. It is not as time-consuming as personal loans
- Collateral-free and unsecured loans can be provided as business loans.
- These business loans have a flexible and long tenure of up to 10 years and even large loan amounts up to Rs. 2 crores can be availed for business requirements. These features help the applicant to deal with sudden expenses and other such financial emergencies without any hassle.
- The business loan interest rate normally starts from 14.99% and varies from individual to individual depending upon his eligibility.
- To avail of the small business loan, you can be self-employed; a trader, manufacturer, or you could be employed in the service sector as well. SMEs, MSMEs, partnerships, and small and large enterprises can also apply for these loans.
- The availability of the loan depends on profitability criteria, business turnover, operation history, business existence, and credit score.
Documents Required for Small Business Loan
- Recent passport-sized photograph
- ID Proof: Passport, Aadhaar Card, PAN Card, Driving License, Voter ID Card
- Proof of business existence for the last 3 years
- Address proof: Aadhaar Card, Voter ID Card, Driving License, Utility Bill, Passport, Water Bill, Electricity Bill
- Income Tax Return (ITR) of last 3 years
- Business address proof
- Certified copy of partnership deed
- Financial documents audited/attested/signed by Certified CA
- Copy of trade license
- Bank statement of last 6 months
- Balance sheet and Profit and Loss account statement
- Sales Tax Certificate
- Proof of ownership of the possessions used
- GST registration certificate
What is a Personal Loan?
They are like credit cards, which usually have high rates of interest, especially for borrowers with poor credit rating: They can be of two types:
a)Secured Loans for Businesses
These loans can be equipment loans, term loans, loan against property or loans taken against any valuable asset which is used as collateral to avail the personal loan.
b) Unsecured Loans for Businesses
When loans are acquired without any collateral, these are called unsecured loans. This is applicable in case when the loans have a short turnaround time as compared to secured loans. No collateral or security is required to get this loan.
Features of Personal loans
- These are not regular business loans but are personal loans that can be used for various purposes. These come at a higher rate of interest, and a comparatively lower loan amount than business loans.
- Personal loans are quite flexible to use.
- It also has a flexible tenure ranging from 1-5 years and requires minimum documentation to process the loan application.
- The disbursal of personal loans is quick and does not need a stringent verification process to approve the same. The money can be credited into your account within 5-7 working days.
- The interest rate starts from 10.6% and varies from bank to bank depending on the applicant’s professional details, income, age, repayment ability, and credit score.
Documents Required for Personal Loan
- Signed Application Form
- Identity Proof (PAN)
- Residential Address Proof
- Last 3 years ITR (self and business), profit and loss account, balance sheets certified/audited by a CA.
- Last 12 months bank account statement (self and business)
- Certificate and Proof of Business Existence
- Business Profile
- Office address – ownership/ lease / rent agreement/ utility bill
Conducting a successful business without failure and arranging for capital and finances is not easy. It is a challenging process, and many enterprises need expert advice to arrange for funds for the continuous and hassle-free running of any business. Both, personal loans and small business loans have their own set of advantages and disadvantages. If you need a larger amount of funds then business loans should be opted for and if the business requires short-term payable funds, then a personal loan is a better option to go for.
The prime objective is to deal with all the expenses related to business without facing any losses and hence it is imperative to analyse both types of loans diligently as per your business requirement.