If you have been bitten by the entrepreneurial bug, things can get exciting but also confusing. You may have the best business idea and a market for your product or service but without adequate finances, it may be hard for your business to lift off. New entrepreneurs are often caught in the dilemma of which loan to take for their business. Both personal loans and business loans have their place for budding and new entrepreneurs. Choose the most suitable loan depending on the quantum of loan and above listed parameters.

Here is a look at pros and cons of personal loans vis-a-vis business loans and ideal scenarios to opt for either of them for kick-starting your business.

Entrepreneurship and personal loans:  

Many first time entrepreneurs do not have a business setup for lenders to evaluate. Opting for a personal loan becomes the first option for many as such a loan allows the flexibility of using the funds as per one’s wishes.

Personal loans do come with a higher interest rate than most business loans. But there are two other reasons why you should consider them seriously to fund your business.

Easy availability of loans: You can get a personal loan instantly if you fulfill the basic eligibility criteria. Some banks are even offering instant personal loans where you can get a pre-approved loan by just walking to your ATM. So for any emergency related to your business setting-up phase, a personal loan can be your best friend.

No Collateral woes: Banks usually seek collateral security for business loans. If you are just starting out, you may not always have a collateral security to offer. Opting for a personal loan therefore becomes easier and more effective as a first time entrepreneur.

Disadvantages of opting for a personal loan for business:  

Personal loans are after all designed for personal expenses. Here are some disadvantages if you are planning to take a personal loan for business.

Your borrowing ability gets reduced: When opting for a personal loan for business you are effectively reducing your chance for any further borrowing of funds. This is because personal loans come with high interest and short tenure, which means hefty EMIs for you. This may increase your Fixed Obligations to Income Ratio (FOIR), for other future lenders.

Higher interest rates: Personal loans are unsecured loans and that is the reason they come with a high interest rate. Business loans may be a little hard to come but come with lower interest rates reducing the overall repayment for the loan.

Chances of misuse of funds for personal expenses: Taking a personal loan for business can easily lead to the cardinal sin or mixing personal and business finances. Crossing the thin line of keeping personal and business finances separate can lead to a high risk scenario impacting both your personal and professional finances.

Business loans and entrepreneurship:  

Business loans are tailor-made for entrepreneurs including experienced and budding entrepreneurs. There are loans available for working capital requirements, import of machinery, setting-up of office, etc. This gives you freedom to choose the best loan for your need as an entrepreneur.

Here are some scenarios where opting for a business loan can work well for you as an entrepreneur.

Your business qualifies for CGS: To promote business the government offers collateral-free loans up to Rs. 1 crore if your business falls under the credit guarantee scheme. So check if your business qualifies under the scheme, since opting for a business loan is far more lucrative and pocket friendly.

Have an existing personal loan: If you already have a personal loan running, chances of getting another one would quite low. Since personal loans are offered based on your earnings, even if you qualify for one, you may not get adequate quantum of loan. Opting for a business loan is more beneficial in such a scenario.

Here are some scenarios where a depending on business loan may not help you.

If the business is yet to be launched:  For budding entrepreneurs who have yet to launch their business, a business loan may be hard to come by due to lack of ITR and business income proofs. If you are relying on business loans only, it will be difficult.

High loan amount needed: It is difficult to get big loan approvals when it comes to business loans, as banks are always careful in lending to entrepreneurs. This is because down time in business can impact them. Relying on a personal loan helps here.

Unsecured loans come with higher interest rates: Business loans are of two categories: secured and unsecured. Unsecured loans come with interest rates close to that of personal loans. Secured business loans come with lower interest rates, but you need to a collateral to pledge to the bank.

The author is CEO, BankBazaar.com