Personal Loan vs Business Loan: Which One Do You Actually Need?

A shop owner who needs Rs 5 lakh for new stock can take a personal loan or a business loan. Both put the same money in the bank account. But the papers, the cost and what you may do with the money are different, and picking the wrong one can cost you time or tax benefit.

What each loan is for

A personal loan is lent to you as a person. The lender looks at your own income and your own record of paying earlier loans. You may use the money for almost anything: a wedding, a medical bill, home repair, travel.

A business loan is lent for the business. The lender looks at how long the business has run, its sales through the bank account and its tax returns. The money is meant for the business: stock, machines, a new branch, paying suppliers.

How they differ

• Papers. A personal loan usually needs KYC, salary slips and bank statements. A business loan also asks for business proof such as a GST certificate or Udyam registration, ITR of the last two years and a longer bank statement.
• Amount. A personal loan is tied to your monthly income. A business loan is tied to the sales of the business, so a healthy business can often borrow more.
• Time. A personal loan for a salaried person is often decided in a few working days. A business loan takes longer because there is more to check.
• Tax. Interest on a loan used for the business can normally be shown as a business expense. Interest on a personal loan used for personal needs cannot. Ask your CA about your own case.
• Security. Both can be given without security. A bigger business loan may need property as security, which also brings the rate down.

Which one suits you

If you are salaried and the need is personal, a personal loan is the simple choice.

If you run a business that is two or three years old, files ITR and banks its sales, a business loan usually gives a bigger amount and the interest can be shown in the books.

If your business is new or most sales are in cash, lenders have little to check. A personal loan on your own income, or a loan against property, may be easier to get.

A common mistake

Many owners take a personal loan for the business only because it is quicker, and then cannot show the interest as an expense. Others apply to five lenders in one week. Every lender checks your credit score, and many checks close together can pull the score down. It is better to apply to one or two lenders who are likely to say yes.

The short version

Match the loan to the purpose and to the income the lender can check. Personal need and salary: personal loan. Running business with clean books: business loan.

Comparing offers on BankLoanKart is free, and we never ask for money before a loan is approved. Share your details once and a loan adviser will tell you honestly what is possible.