(This article was originally published on the 17th November 2017 and updated on the 6th July 2020).
A way to ensure you have enough cash to support or grow your business is to take out a loan. You can either apply for a personal loan or a business loan. Here, we outline the differences between these two types of loan. And also some tips to help you decide which one is right for you or is a better funding for your company.
The Differences between a Personal Loan & Business Loan
Personal loans are given to individuals and can basically be used for any purpose. They are normally unsecured loan (called ‘clean loan’), meaning that the lender does not require any form of security (collateral) for the loan. Instead, a personal loan is given based on the borrower’s creditworthiness. Usually loan providers would look at the borrower’s credit history through their CCRIS/ CTOS credit record, earning potential and repayment ability.
On the other hand, a business loan is designed for business use, and is given to companies or business entities, not individuals. A business loan can be used to buy business premises, equipment or help with funding working capital.
When to use a personal loan to finance your business?
1. The loan amount needed is relatively small
If you just need some money to buy computers or some stock for your business, it would make sense to apply for a personal loan. Personal loans can be from as little as RM1,000 to RM250,000. Furthermore, a personal loan can generally be approved faster than a business loan and require lesser documentation to be submitted.
2. You have just started a new business & have no track record
For a business loan to be approved, you normally require a track record of at least 2 or 3 years, and have a business that is generating good cash inflows. If you cannot provide financial documents to support this, it may be better to apply for a personal loan based on your earnings ability or income instead.
3. You cannot provide collateral for a business loan
A business loan normally requires collateral such as property, car or equipment to protect the lender or bank in case the borrower fails to make the loan repayment. If you cannot or are not willing to offer any form of acceptable collateral to the bank, you may have no choice but to apply for a personal loan which can be granted without any collateral.
When to use a business loan to finance your business?
1. The loan amount is large
A personal loan is not easily granted without collateral for large loan amounts. So if you need an amount of say RM200,000, a business loan would probably make more sense. However, the minimum amount for a business loan varies among banks. For example, some banks may set a RM100,000 minimum amount, for some special small medium enterprises (SMEs) loans.
2. Your business has been operating for a number of years & has a good track record
It will make sense to consider a business loan if you can prove to the lender that you are of low credit risk and can be expected to make your loan repayments as required. This will be much easier if your business is also generating enough cash on a regular basis and you have a good business plan. In such cases, it is likely that you may be able to get lower rates, better payment terms or other useful low cost credit for a business loan.
3. You can qualify for a government supported business loan
There are various government supported loans introduced to help SMEs get business loans. Some examples are those loan schemes related to Credit Guarantee Corporation Malaysia Berhad (CGC) and BNM’s Fund for SMEs. If your business is a SME and you qualify for one of these types of funding, it may be a better option than a personal loan as such loans tend to offer lower interest rates without a need for collateral. Government supported loans are available through major banks in Malaysia.
In conclusion, when it comes to deciding which type of loan is more suitable for your business, apart from finding the cheapest rates, it is important to consider repayment ability and whether the loan is easily accessible.
If you would prefer to apply for a personal loan, Direct Lending is ready to help you. Let us source for the best personal loan that best fit your financial needs to help you grow your business. Our services as always is 100% free with no hidden charges or upfront payment involved. Read our Google reviews to see what our satisfied customers have said about us.