Personal loans for business: 5 crucial considerations before borrowing | Mint

Personal loans have become more popular among people who want to finance several needs, such as: medical expenses, education or business growth and expansion etc. But funding business through a personal loan is a little complicated and has several issues to be considered before applying for it. Here are five significant things to keep in mind when considering using personal loans for business:

1. Easy availability of money

Among the strongest advantages of personal loans is quick access to funds. Unlike traditional business loans, with their massive paper work and lag in approval, personal loans might be approved promptly, even in hours. They are therefore appropriate for business professionals who might be in need of fast capital in order to finance operational costs or invest in new businesses in times of crisis.

2. Unsecured nature

Personal loans tend to be unsecured, therefore the borrower isn’t required to put up collateral. This actually is a highly convenient feature for new business owners who don’t yet possess something of value on which to borrow against a loan. However, this carries with it the threat that lenders will lend at an increased interest rate than secured small business loans, and complex loan repayment terms, this may be a point of extra financial stress if it isn’t dealt with wisely. Secondly, the repayment terms might also be less favourable due to the unsecured nature of these loans.

Large Indian banks offer business loans at varying interest rates: HDFC Bank (10.85%–24%), ICICI Bank (10.85%–16.65%), SBI (12.60%–14.60%), Bank of Baroda (12.15%–18.50%), and Union Bank (11.50%–15.20%). The rate of interest for these loans also depend upon individuals credit profile health, credit scores and loan tenure.

They can even vary depending upon the changes in bank policies, interest rates, processing fees and changes as per RBI directions. That is why it is always prudent to reach out to your financial institution for the actual and correct rate of interest applicable in your case.

Note: The rates discussed here are elaborative in nature. For actual rates consider reaching out to the concerned bank and its customer support team.

3. Loan amount limits

Personal loans, though convenient, have lower borrowing capacities than business loans. Most lenders set personal loans at a limit of ₹10 lakhs, which may prove inadequate for capital-intensive ventures or extensive expansion programs. Entrepreneurs will have to strategize their financial needs well and their repayment capacity before opting for this route.

4. Impact on personal credit score

A personal loan has an effect on the creditworthiness of an individual since it is reported against his or her individual credit history. Now your consistent repayment punctuality enhances creditworthiness, but failure to pay has a serious impact on your credit score. That is why if you are looking to start a new business you are advised to avoid having a faulty repayment plan and end up messing up your credit profile and financial health. Any impact on your credit score will make future loans and credit card applications more complicated.

5. Tax implications

Interest on personal loans taken for business may not be exempt if there is no sufficient documentation to prove that the borrowed amount has been incurred on business expenditure. This could make tax filing challenging and requires due documentation on behalf of the borrower.

Apart from that, it is always best that a chartered accountant, financial advisor and a tax consultant be consulted to understand how personal loans taken for business are to be accounted for by way of tax.

Therefore, although personal loans are a convenient source of finance for business start-up or expansion in India, they have inherent constraints and dangers which must be thought through very seriously before committing to such loans products and services.

(Note: Raising a loan comes with its own risks. So, due caution is advised)