Getting money for your business is hardly ever an easy task but it needs to be done in order for your venture to survive and thrive. If you had to choose between a personal or business loan to support your activities, which do you think would provide the cheapest, most convenient access to cash for your company?
To help you understand the finer points of these loan types and their appropriateness for your specific business, here’s a list of pros and cons.
The Pros of Taking out A Personal Loan for Your Business
1. Easier to Apply
The process for getting a personal loan is relatively simpler, faster and with fewer documentation requirements than a business loan. All you typically need is your identification, bank statements, EPF or tax form.
2. Fast Approval
These days, personal loans can be approved in a matter of minutes – which in other words, equals an on-the-spot approval. This is of course invaluable to people who require fast cash for their business. Still, we’ll note that some business loans can also move quickly to expedite the process.
3. Ideal for Start-ups
New businesses, sole proprietors and start-ups would have an easier time applying. Moreover, for many business loans, expect companies to already be in operation for at least a year or two to be eligible.
So that’s the positive side of getting a personal loan for your business. But now, let’s consider the possible drawbacks for this type of financing.
The Potential Cons of Taking out A Personal Loan for Your Business
1. Higher interest rates
The rates for personal loans have a rather wide range from as low as 3.26%, typically for government workers and low-incomes earners all the way up to 18% to 24% per annum. The average for a basic personal loan is 6% to 8%. Higher rates are usually applied to quick disbursement loans whereas lower rates may be offered larger loans.
2. Limit on Financing amount
If you do need a sum larger than RM150, 000 to RM200, 000, it’s unlikely that you’ll find it easily with a personal loan. For such large sums, you might need to opt for a business loan or perhaps even property refinancing (if you own property).
Now you know all about the benefits and downsides of taking out a personal loan for your business, but what about the potential upsides and disadvantages of business loans?
The Pros of Getting a Business Loan
1. Better Interest rates
The average rate for business loans is just 5%, which could mean rather significant savings on interest costs, especially if you are intending to borrow a larger sum. However, not all applicants will be guaranteed a low rate as the strength of company’s financials will determine the rates you receive.
2. May provide revolving credit or overdraft facilities
A revolving credit facility is a contract that allows the borrower to borrow, repay, and redraw a loan until the contract is over. This type of flexible financing can help financially support companies until their debtors pay up. Similarly, an overdraft facility allows a business to withdraw money on credit to meet their short-term cash needs such as paying vendors, staff or even buying supplies.
3. Government Assistance Scheme
For small-to-medium enterprises that lack the necessary collateral to get approved for financing, the Government Assistance Scheme could help guarantee a portion of the loan. This would mean a higher amount of financing at affordable rates for eligible companies.
The Possible Cons of a Business Loan
1. Not all business types are eligible to apply
There are certainly limitations and restrictions to some business loans. Your loan might be tied to the nature of your business, sectors and financing purpose. You might not be eligible to apply for a basic business loan if you want to build an investment business or buy property for flipping.
2. May require collateral
Although no-collateral business loans do exist, most require some sort of pledge especially for large loans and ones with smaller interest rates attached. There is of course a risk whenever you promise collateral like your house, car or fixed deposit account; you could end up losing it if you default on your loan.
3. Shorter Tenure
With shorter tenures, averaging five to seven years, you might be stuck with larger, more expensive repayments. You may also be forced to borrow a smaller amount if you already have other financial commitments or if you are stretched with current debts.
So Which Type of Loan Should You Take?
While we can’t make this decision for you, here are a few handy pointers to help you decide:
Consider a business loan if:
a) Your business has already been in operation for a number of years.
b) You can wait a reasonable amount of time to receive your funds.
c) You need to borrow a larger amount of money.
On the other hand, you might be better off with a personal loan if:
a) You are just starting out.
b) You're not looking to borrow a huge sum of money.
c) You need cash fast.
d) You don’t want to go through the hassle of applying for a business loan.
Need help finding an affordable personal loan for your business venture? Then check out our comparison page to research as much as you need to find a personal loan that’s just right for your business!