Wednesday, 1st December 2021 | Personal Loan
The big difference between personal and business loans
Business and personal loans each come with their own pros and cons. At iCapital, we're here to answer your questions and help you make a sound choice as to what's better for our business.
You've just received a large order for your start-up and need to replenish your inventory. Perhaps you'll need to recruit someone. You may also wish to increase your digital marketing budget. You will lose the opportunity to expand at a vital time if you do not put money into the firm.
With a loan, you'll be able to take advantage of possibilities while keeping your financial flow safe. However, understanding the difference between a business and a personal loan is crucial to managing debt in Canada.
iCapital, with years of experience, outlines the advantages and disadvantages to help you decide between business and personal loans in Canada and what suits your needs best.
Pros of a Personal Loan
Lower Cost
An advantage of a personal loan is that it is less expensive than a company loan. If you already have a home equity line of credit, it can be a less expensive method to borrow.
Speed
If you already have a banking relationship or a line of credit, you can get a personal loan considerably faster. It makes sense to use your line of credit when you need money fairly urgently, like if you need to make payroll the next day.
Ease of Access
If your business has not yet generated considerable revenue and you have a good personal credit score, a personal loan may be easier to secure than a business loan.
Cons of a Personal Loan
Not Creating Commercial Credit
Commercial credit includes data from organizations that do business with you, such as suppliers and banking institutions, which is why your business credit score differs from your credit score. If you regularly rely on personal loans and lines of credit for business funding, you'll be limited in the future.
Higher Interest Rates
Personal loan lending restrictions are frequently less stringent than business loan restrictions. Interest rates may be exceedingly high if you have bad credit.
Personal Liability
The major disadvantage of a personal loan is that your personal and business money are not separated. If your company defaults on the loan, your credit will suffer, and you will be held personally accountable.
Keep in mind that for company financing, personal guarantees may be necessary.
Pros of a Business Loan
Building Commercial Credit
Getting a business loan, a business line of credit, or using company credit cards might help your firm's financial reputation grow.
Better business credit can result in better terms, higher lending limits, and more credit from suppliers. Your bank will be considerably more willing to lend to you in the future if your firm has a track record of repaying loans.
Filing Taxes is Easier
Fees, fines, and interest paid on money borrowed for business purposes or on property acquired for business purposes are all tax-deductible expenses. It would be easier for you to track your expenditures and file your taxes if you keep your personal and company accounts separate.
Higher Lending Limits
Business loan lending limitations are frequently substantially greater than personal loans lending limits. Your income and the collateral you provide will determine the exact amount.
Cons of a Business Loan
Incorporation is Often Necessary
In most cases, your business must be incorporated to be granted a business loan. iCapital lends money to businesses that have been operational for at least a year.
Longer Wait Time
It can take a long time to be approved for a large business loan. Smaller company loans can be secured in a matter of days or hours. Larger loans, on the other hand, may take several weeks to complete.
Difficult for Start-ups to Qualify
It may be challenging to obtain a loan if the company hasn't produced much money yet. Entrepreneurs with a valid business plan can apply for a start-up loan. They could also look into venture capital financing options.
Which is Best for Your Small Business?
If you qualify for a business loan and you need the money right away, a business loan is usually the best option.
You need to prove that you can qualify for and manage business loans if you're serious about developing your firm and building your reputation with lenders.
Before asking for a business loan, entrepreneurs should do their homework. You should have financial documents and predictions on hand, as well as a business plan, a synopsis of your management team, a company overview, and specifics about why you need the money.
Business owners should also speak with their lenders about credit as soon as possible.
Don't put off creating business credit ties for too long. Confirm that your cash flow estimates are accurate and that credit will be available when you require it. The ideal time to talk about credit needs is before you're in a pinch.
iCapital Understands Your Borrowing Options
In the end, it is up to each individual to decide whether the risk is worth the gain. For some, a personal loan to finance a business investment is quick, convenient, and straightforward. On the other hand, using personal loans instead of business loans exposes you to the genuine financial danger that isn't worth accepting.
Get ready to grow your small business with iCapital and find new customers eager to try your products or services. Contact us today at (877) 251-7171 and learn more about our small business loans.
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