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Why Use Business Loans Instead Of Personal Loans For Commerce
If you are planning to start your own business or setup a home office, it is imperative that you would be in need of funding one way or another.
It would be nice to have a healthy reserve of personal funds that can be used for commencing a business any time you want. But for many people, required capital 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 funding requirement, traditional lenders typically 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 a business loan is a better option rather than a personal loan when the borrowed money is meant for business operation purposes.
No guarantor required
In the 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 when it comes to forfeiture of the loan of a business, unless the business owners have signed up as guarantors ignorantly, the assets of the business will stand the threat of getting confiscated by the bank. If personal guarantees were given, then the personal assets of the owners will be under threat too.
A corporate guarantee will put the ultimate liability solely 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.
Let the bank take the printers and coffee machine.
However, 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 eventually still 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 which business owners won’t talk about.
As in facilities like a trade credit line, relevant documents have to be produced and submitted to 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. The is no other way to access the funds.
There is always a temptation to indulge in a little luxury when 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, like a hire purchase, 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, most business loans are disbursed on a short term basis with repayments in installments consisting of both principal and interest.
This is a good thing in disguise as you would not want to bear the burden of the loan for many 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 contain the option of extending the tenor or a “top up” for more money which you may not actually want. Yet being sold on the low interests could tempt you to take on funds you don’t really need.
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.
Like a teacher overseeing children, they might even erect terms in place to ensure you are behaving.
Even bank statements of recent months could be required to analyze the cash flow movement trends.
This helps business owners avoid taking up more credit facilities than the business can actually swallow and allow it to focus on profitability.
Finally, if you need funding and your business is deemed not strong enough to take on a loan, maybe you need to review how your business is doing and fine tune the strategies for growth.