When you’re running a business, you’ll likely encounter circumstances that require you to have some cash on hand. That may include a financial opportunity you need to take advantage of or an emergency expenditure like equipment that needs replacing.
The thing is, business owners won’t always have finances immediately ready for use. Often business finances are already relegated to the different expenses that help keep day-to-day operations going.
A loan is one of the ways you can mitigate this financial lack. But before you consider applying for one, it’s best to learn what type of loans are available to you and the benefits and potential drawbacks of each type of loan. When it comes to businesses, two loans are often compared: business loan vs personal loan.
What are Personal Loans and Business Loans?
Now you might be wondering, “wouldn’t a business loan be the appropriate loan, considering it’s called a business loan?”
While the thought is valid, personal loans remain a viable option for business financing needs. Moreover, it has its own advantages that may come in handy if you require funds for business purposes.
As is the case with any business decision, both options will have their own pros and cons. Therefore, it’s important to weigh the situation and the subject of your current need before getting a personal or business loan.
Business Loans
Business loans provide funding directly to the business. This can include different small business expenses like your employees’ wages, repairing/purchasing/replacing new equipment, or investing in certain ventures that benefit your small business, like research or marketing.
Business needs vary, and because of that, you have many business loans you can choose from depending on your need.
Some of your business loan options include:
– Term loans
– Equipment financing
– Invoice financing
– Trade financing
– Property financing
– SME Microloans
– SME Working Capital Loan
– Temporary Bridging loan
Business loans can either be short- or long-term loans and while all will vary in requirements, they may likely require you to submit many documents about your business, like permits and financial statements. In addition, some types are small business loans only, while others can be used with larger enterprises.
Business loans can be secured loans and unsecured loans, usually depending on the chosen loan type or credit score. A secured loan means collateral is required, meaning an unsecured business loan will not and will usually have a faster approval process.
Depending on the loan type, business loan terms will vary and range from a few weeks to as long as 25 years, with loan amounts going as high as S$5 million.
Personal Loans
Using a personal loan for your business is less complicated than using a business loan (somewhat ironically). Personal loans, as is their namesake, is borrowing money for someone’s personal use. This includes mortgage and auto loans, but a personal loan can be spent on one’s business should one choose to.
When it comes to applying for personal loans, the lender will review your personal finances instead of directly that of your business. This will include your personal credit history and your income.
Personal loans are usually unsecured, meaning they won’t require collateral. This also means that loan approval will typically be quicker and less restrictive in requirements, but being unable to repay means you, the individual, is reliable for the outstanding balance, putting personal assets at risk instead of that of the business.
Personal loan amounts can range from S$1,000 to S$50,000, possibly more. Personal loan terms will usually last from one to five years.
Business Loan vs Personal Loan: The Pros and Cons
Business Loan
| Pros | Cons |
| You can borrow much larger amounts compared to personal loans. | Most business loans might be unavailable for relatively new businesses |
| The debt is usually the responsibility of the business, not an individual. | Loan providers are less likely to approve loans for businesses with existing debt. |
| Business loan products will often include support to help achieve your needs/reach your goals. | Business loan application takes longer than personal loans. |
| Business loans are tax-deductible. | Business loans tend to require that a business has a long and positive trading history. |
| Business loan interest rates tend to be smaller compared to personal loan interest rates. | A personal guarantee may still be required |
Personal Loan
| Pros | Cons |
| Personal loan application is faster. You can get your desired amount quickly. | Personal loans have smaller loan amounts |
| Personal loans do not require any collateral. | Personal loan interest rates tend to be higher compared to business loan rates. |
| Many personal loans have a longer tenure than most business loans. | Personal loans aren’t tax-deductible. |
| More likely to have fixed interest rates. | Repaying a personal loan affects personal credit score and does not help build business credit. |
| Personal loan requirements tend to be laxer. | Some lenders might not approve a personal loan for business use. |
If you choose to use a personal loan for business financing, you may get the money easier. Usually, the only factors to consider are your personal finance records and a good credit score. However, the downsides are clear: interest rates are higher while the loanable amount is lower, and you will be personally liable for unpaid balances.
A business loan, on the other hand, might be harder to get immediately. Both your personal and business finances will likely be looked at, and more. However, the higher loan quantum and lower interest rates are ideal and the opportunity to build business credit.
What are Business Loans and Personal Loans used for?
A personal loan is virtually limitless in its uses because it’s essentially up to the borrower’s discretion. You can use it for financing a car, a house, or any purchase.
If you choose to get a personal loan for business use, there is no limit to where you can spend the money. The only possible limit is if the amount is sufficient for your expenditure, which may be affected by your personal credit. Some lenders limit what a personal loan can be used for, however.
Due to its quick application and approval process, the best uses for small businesses include but are not limited to:
– Financial emergencies
– Paying wages
– Regular business expenses like electricity
– New equipment
– An investment opportunity with a small window of time
– Aspiring small business owners who want capital
A business loan, on the other hand, because of the larger amount provided, pose a bigger risk for the lender, even if it is a small business loan. Therefore, you would need to specify what business expenses you will use it for before approval during application for a business loan.
A business loan is for the express purpose of financing a business, and different loan types cover specific expenses. Bigger business expenses will usually demand a business loan, like:
– Renovating your offices
– Real estate, or opening up a new location
– Larger investments
– More expensive equipment
What are the qualifications for Business Loans and Personal Loans?
Business Loan
Approval criteria will vary from lender to lender and will depend on your chosen loan type. Lenders will evaluate your business based on business credit (they may also evaluate your personal credit), cash flow, financial projects, and even demand a business plan.
Traditional lenders like banks usually require the following:
– Registered in Singapore
– The business must be at least 2 years of age
– Annual revenue of at least S$300,000
– Must be at least 30% owned by Singapore citizens/PRs
Government-backed loans like Temporary Bridging Loan and SME Working Capital Loan requires that a business:
– Is at least 30% owned by Singapore citizens/PRs
– Have an annual group sales of below S$100 million
– Have an employment side of no more than 200
Personal Loan
It’s likely that your personal financial history and debt-to-income ratio will be factored in. You will usually not need more than a good personal credit score to qualify for a personal loan. Foreigners in Singapore are also eligible to apply for a personal loan, depending on their salary and employment permit/pass type.
Other criteria:
– At least 21 to up to 65 years old
– A minimum annual income of $30,000
– Your NRIC
– Some of your payslips
– Some lenders may want to look at your bank statements.
Business Loan vs Personal Loan: Which is Better for Your Business?
When it comes to business loans vs personal loans, one might be a better financing option depending on your specific situation. Both personal loans and business loans have their own pros and cons, and any business owner needs to assess their needs before choosing one.
When should you take a personal loan and a business loan?
A personal loan is more ideal if:
– Your business is still new, as business loans are typically not available to relatively new businesses.
– You prefer not to have any collateral on your loan.
– You need the money quickly, such as during emergencies.
– You need the capital to fund a business idea.
– You only need a small amount of cash.
A business loan is more ideal if:
– You need a larger sum to finance a particular business venture.
– You want to keep your personal finances safe and separate from your business.
– You want to improve your business credit at the same time.
– You do not immediately require the money and would prefer to pay lower rates.
What to consider when choosing between the two loans
The size of your business
One of the major considerations in choosing between personal loans and business loans is how big your business is. A personal loan can be used as a small business loan, especially by those who do not qualify for the business age.
However, there are smaller loans tailored for SMEs. These small business loans are called SME Micro Loans and may also be worth checking out, but there may still be a limit to how old a company is before qualifying.
Bigger businesses will likely have bigger expenses; therefore, they must naturally resort to business loans.
How quickly you need the money
Some situations are completely out of our control. For example, you may face a financial emergency, are currently short on funds to pay monthly dues, or have a financial opportunity that you don’t want to miss out on. In that case, choose a personal loan.
Business loans are the better choice if you are in no rush to spend the money.
Secured vs. Unsecured Loan
Most people will likely prefer not to have collateral when borrowing, as it may put their assets at risk. Thankfully, personal loans are always unsecured. While business financing is mostly secured, SMEs can go for Unsecured Business Term Loans, which are popular as small business loans because of their flexibility.
FAQs
1. Can I use a personal loan for business?
The use of personal loans is left to the discretion of borrowers and can be used for business purposes. However, do note that some lenders might not approve of using the loan for business.
2. What are my other options?
You may use a line of credit. While this limits how much you can use in a month, you only have to pay for what you use, and it comes with the benefit of being immediately available when you need it.
Alternative lenders like a credit union or an online lender may have comparatively less strict criteria and may be more amenable to getting your loan approved.
Closing
But always remember to go for licensed moneylenders that you know you can trust, like Raffles Credit.
Raffles Credit is a legitimate moneylending service in Singapore. Our services can provide you with a personal loan for up to 6 times your monthly income without any need for collateral or any hidden charges, or a low-interest business loan for up S$200,000 for all your business needs.
Either way, the application is hassle-free, and paying it back is even more so with our flexible payment terms, so you address your business needs without worrying.
