What’s the Difference between a Personal Loan and a Business Loan?

What’s the Difference between a Personal Loan and a Business Loan?

At some point in their lives, most people will need to take out a loan. It may be to buy a home, education, office renovations or cover unexpected costs. So, what’s the difference between a personal loan and business loan? And how do you know which you should apply for?

What is a Personal Loan?

A personal loan is one you take out for yourself. You assume responsibility for paying it back and sign the legal documents, which include the loans Terms & Conditions. They can be used for a number of purposes. Some institutions require you to have someone sign a surety. This means that should you default on an instalment, the person who signed will be responsible for repaying the loan. This often happens if you are self-employed. Depending on the amount being borrowed, the lending institution may make you take out an insurance policy. They could also stipulate what the loan is allowed to be used for.

How is Loan Amount Determined?

The loan amount is determined by a number of factors, such as credit rating, amount of current debt, income history and employment status. Using this kind of information, the lender assesses the risk of loaning your money and then based on their risk analysis offers you a loan. The amount you will be expected to pay back is more than what you borrowed. How much more, depends on the loan fees. Loan fees are the cost of borrowing money, for example the interest rate and administrative fees. A loan calculator can help you estimate ahead of your application.

Which Personal Loan is Best?

Which loan is best for you will depend on a number of factors. These are 5 which are good to include in your evaluation of which personal loan you should take and from who.

5 Things to Consider when Choosing a Personal Loan

Total to be repaid for loan (principal amount, interest charges and loan fees)
Interest rate
Loan fees
T&Cs (repayment structure, default penalties…)
The reputation of the lending institution

What is a Business Loan?

A business loan is linked to a business. It may be an existing one that needs to borrow money for a specific purpose. Or it could be to someone wanting to start their own business.

How to Get a Business Loan

When extending a loan to an existing company, a business loan is determined in relation to the financial health of that business. This means that some lenders won’t take into account an individual’s credit rating. But rather they will look at the accounting books of the company as well as the company’s assets. However, those opening a new business may have to provide personal financial information in addition to the proposed business’s information.

What Information is Required

The documents needed to apply for a business loan are usually linked to the existing finances of a business. For example, annual financial statements and cash flow forecasts. Loan agencies typically have other stipulations to qualify for being considered for a business loan. These might be how long the business has existed, the annual revenue of it and its location. A business plan is often requested as well as an outline on what the money will be used for. As there are many reasons for a business needing money, you may have to be quite specific. For example, you may need the money to purchase equipment, launch a marketing campaign, open a new store or cover receivable gaps.

Where to Apply Business Loan

Most often you will need to apply to a number of loan institutions in order to be successful. Ideally, more applications should mean more options to choose from. In South Africa it is reported that there are at least 146 different funders for Small Medium Enterprises (SME). These provide more than 328 different types of business loans. However, this does not make applying for a SME loan easier. Nor does it mean that you are more likely to be successful in your application.

The starting point of any business loan application is to make sure you know exactly why you want a loan. And you need to be sure that you are applying for a business loan for the right reasons. Then you’ll need to be able to outline what it will be used for and how it will benefit your business. Thereafter, the time of the loan and how it will be repaid. In some instances, you may only require access to an overnight facility. This allows you to make a payment while you wait for someone to pay you.

Secured vs Unsecured Loans

A secured loan is a collateral loan. It is therefore attached to an item, for example Gold & Gold Jewellery. This type of secured loan is also known as a Gold Backed Loan or Collateral Gold loan. An unsecured loan is not linked to anything and therefore doesn’t require collateral.

If you’d like to reduce the risk of taking out a loan, then a secured loan may be the answer. In the event you cannot pay an instalment, the collateral item will be used to cover your loan repayment. Because there is less risk for the lender, often the cost of borrowing the money is reduced. Thus, Coughlans is able to offer Gold & Gold Jewellery Collateral loans with highly competitive interest rates and easy loan terms. Coughlans has over 110 years of experience in extending personal loans and business loans to those who need it most. This includes loans for those with bad credit, blacklisted or unemployed.

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