Autin Vera, Negosentro | Are you planning to put up a business that requires substantial capital? Do you want to create a sustaining money earning business alongside pursuing your personal dreams and aspirations in the business industry? Ingredients of a successful business include tons of passion, drive, a thorough study, and a start-up capital.
Many aspirant entrepreneurs have already conceptualized the business they want to enter with, but are having difficulty or little capacity in raising a capital.
But in fact, there are various ways to obtain capital for a feasible business. Banks and other financing institutions are now offering several types of loans tailored to fit your financing needs. This includes business loans and personal loans. Nonetheless, having a bank or financing partner can help you start your business.
Frequently asked questions about loans are answered below:
- Where can I obtain a personal or business loans? Loan products are now widely offered in banks, financing companies and by licensed money lenders.
- Is there an application fee? How much is the interest rate? Other financing institutions do not charge an application fee. Interest rates also vary but can be anywhere from 3.5% – 10%.
- What are the initial requirements needed to comply? This will be discussed thoroughly below.
- How much is my monthly amortization? This will depend on the amount of loan granted, the interest rate imputed, and the term of the loan.
- Shall I get a business loan or a personal loan? There’s a certain distinction between a business and a personal loan; the difference is discussed below.
Personal Loans VS Business Loans
How do personal loans differ from business loans? How would you know what type of loan best suits my financing needs? Let’s discuss both loans for better understanding.
What is a business loan?
A business loan is a type of loan intended solely for business purposes. These purposes include additional capital infusion, inventory build-up, repairs and maintenance of the business FFEs (furniture and fixtures), and other matters related to expanding a business. Business loans are also called for a franchise loan, SME loans (Small to Medium Enterprise Loans), and Credit Line (for bigger business models).
What are the requirements for applying for a business loan?
In applying for a business loan, one must establish the purpose of the loan. Initial requirements include the following:
- Business registration papers
- Partnership/Corporate papers (for businesses other than sole proprietorship)
- Historical records of the business’ performance for the past years, which also includes the reported financial statements
- KYC (Know your customers) interviews with the financing company
- Ocular inspection of the business location/s
- Some trade checking references for the business’ top customers or suppliers
On top of the mentioned documents, collaterals are also required.
Based on the requirements above, a business loan usually takes longer to evaluate and requires ample time for processing and approval.
What is a personal loan?
Personal Loan is a more flexible type of loan that does not necessarily require a specific use. It is for immediate financial needs, which means you can also use it in backing up a capital requirement of your start-up business. It uses a credit score card to assess your creditworthiness, which will also be the basis of the financing company as to the amount and the interest rate they can offer. Higher credit standing could mean haggling your interest at a lower rate.
What are the requirements for applying for a personal loan?
Requirements for a personal loan are not as tedious with business loans and the approval process is definitely faster. Usually, lending companies will only require the following:
- Personal identifications (IDs and proof of billings)
- Employment history and payslips (if employed)
- Proof of income and minimal business registrations (if self-employed or has his own business)
When to Finance Using a Personal Loan?
1) Yet to start a business – If your business is in the conception stage, you will find it extremely difficult to raise a capital through a business loan. Banks and financing institutions usually extend loans to a company that is already operational and not on mere ideas. While your business idea or the business itself may have potential, bank and financing institutions only lend money to companies with a track record and with established profitability. Bank loans are debt and not risk money, and usually, loan amounts extend up to the source of repayment which is the existing business. Hence, if you need financing for a start-up business, consider a personal loan instead.
2) If you’re worried about collateral – Banks and financing institutions generally require a collateral to match the loan they extend to a business. This collateral may be in form of real estate properties, bank deposits, and assignment of receivables, stock certificates, membership club shares, or sometimes chattel mortgages for machinery used in the business. Typically, it covers 80% – 100% of the loan amount. Additionally, they also require a credit-worthy individual or corporation to act as a guarantor or surety to support your loan. If you are unable to provide a guarantor, banks tend to refuse the loan. In these cases, you may have to resort to a personal loan to fund your business.
3) The loan amount is small – If the capital you need for your business is not that substantial, opt for a personal loan instead of a business loan. This will lessen the loan requirements and the turn-around time for getting the loan proceeds. A business loan works best if the amount needed is larger in nature since the procedure to avail is typically more stringent and longer. Business loans need a plethora of documents related to business registrations and operations, compliance with regulatory taxes, and business models among others. A personal loan is generally hassle-free and for smaller amounts, it may be well worth it.
4) No questions asked about the money – A business loan comes with strings attached. Business loans are extended based on how you will use the money. If the bank feels your business plan is sketchy, the loan will be rejected. On the other hand, personal loans are extended for any purpose and no questions are asked about how the borrower will use it. In such cases, if your business plan is vague, but you still want to take the risk, the personal loan should be able to help you out.
Finding a way to finance your business is crucial
Starting a business without external or financial help is still the best option for a better return on income. Using your own savings to put up a start-up business will make it easier for you to trace your cash flow as all profits can be easily plowed back in the business. This is mostly achieved if the business you plan to enter with does not require massive capital infusion. That way, you’ll not worry every time your monthly loan amortization is near its due date.
Nonetheless, there’s still no harm in opting to avail bank loan products if necessary. The secret ingredient will still be in choosing the right financing option that can help you succeed in your start-up business.