If you are planning to start your own business or setup a home office, it is imperative that you would be in requirement of funding. It would be nice to have a reserve of personal funds that can be used for commencing a business. But for many people, required capital needed to for these activities have to come via borrowings. Even when there is substantial cash on hand, most people prefer to take loans from banks for leverage rather than invest their own savings on the new business. For such a requirement, traditional lenders offer two types of loan, i.e. business loan and a personal loan. There are pros and cons to each type. However, studies and experiences of various people confirm the fact that business loan is a better option at times rather than a personal loan.
No guarantor required
In case of a personal loan, a bank will require a guarantor whom they can pursue in case there is a delay in repayment or an outright default. However in case of a business no such guarantor is required as the business owners are considered to be the guarantors and in case of forfeiture of the loan, the assets of the business and even the personal assets of the owners will stand the threat of getting confiscated by the bank. A corporate guarantee will only put the ultimate liability on the shoulders of the business. So in case you do not have any guarantor who would vouch for you, business loan is a better option than personal loan.
Take note that if you are running a new company without a track record, it will be difficult for a lender to agree on a corporate guarantee when the company has no assets. So you might have to take it up personally in the end.
Use money only for business
Ideally the amount received from the personal loan can be spent on anything and everything that you may like. If you are planning to use the proceeds for your home office, you may end up spending the money somewhere else and not invest on business. Here is the benefit of a business loan over a personal one. As in facilities like a trade credit line, relevant documents have to be produced in front of the bank for them to churn out an authentic Letter of Credit for trade purposes. So the money that you are borrowing will be used for the purpose it is getting borrowed for.
There is always a temptation for indulging in yourself where there are no restrictions on the usage of funds. Because there might be no parameters to give guidance to your discipline, funds for personal loans could end up paying for a festive holiday in Bangkok or a new luxury watch on sale you saw in town. When there are restrictions on how the money can be used, you will be forced to be objective and goal-oriented to utilize the funds for it’s sole purpose in the first place.
Short term loan is good
Generally a business loan is being disbursed on a short term basis wherein within a short period of time the principal amount along with the interest has to be returned back to the financial institution. This is a good thing in disguise as you would not want to bear the burden of the loan for long years. Instead, once your business stabilizes and money starts flowing in you would want to get rid of the outstanding as early as possible. Personal loans will often have the option of extending for long years or a “top up” which you may not actually want.
Once the amount is disbursed, in case of a personal loan the bank authorities would be least bothered about what you do with the money as long as they are getting their monthly repayment money. This however is not the case for a business. Many banks would want the annual financial report of the business to understand whether the business is making money or running into loss. Even bank statements of recent months could be required to analyze the cash flow movement for recent months. This helps the business owners avoid taking up more credit facilities than the business can actually swallow and allow it to focus on profitability.