Business Loans

Business Loan vs. Consumer Loan: Differences and Similarities

Many up-and-coming entrepreneurs apply for consumer loans to generate capital for their businesses since they are relatively easy to qualify for and quickly acquired. Although there is nothing wrong with using a personal loan for business purposes, it does have a few drawbacks. 

If you’re a small business owner and wondering, “when do we consider using personal loans for business?” you’ve come to the right place. In this article, we’ll discuss the differences between a business loan versus a consumer loan and explore the advantages of each.

What is the Difference Between a Consumer Loan and a Business Loan?

The primary purpose of a business loan is to fund business needs. They’re intended for purchasing revenue-generating investments or funding your business’s day-to-day operations. Business loans are also used for acquisitions, renovations, supply orders, payroll, and more.

Meanwhile, consumer loans are more flexible as they fund personal and business needs. They’re generally easier to obtain because lenders will only be looking at your own finances for approval. The most common examples of consumer loans are personal loans, auto loans, and home loans.

Now that you know the difference between a consumer loan and a business loan, let’s find out which one fits your needs best.

Business Loan vs. Consumer Loan

Exploring the topic of differences between business and consumer loans will help you paint a clear picture of the benefits and drawbacks each option may offer. For example, if you prefer a particular timeline for your loan payment, you can explore the terms of each loan.

Nowadays, you can get both short- and long-term consumer and business loans, which provide you with the opportunities below:

Long term loans

  • Lower monthly amortization
  • Larger loan amount
  • Lower Interest rates

Short term loans

  • Shorter time incurring interest
  • Easier to acquire
  • May help increase credit score

Before choosing a loan type, it is best to consider all the factors in your decision. These may include your financial history, business credit score, personal credit score, and long-term business objectives. These factors will help you understand which type of loan you qualify for and what works best for your situation.

Business Loans

1. Eligibility requirements

Most lenders will require a small business to have a stable and predictable cash flow to qualify for SME loans. In addition, they may require more paperwork such as financial statements, business plans, licenses, permits, etc.

2. Loan terms

Depending on your industry, business loans can be repaid over a more extended period, ranging from two to 20 years.

3. Loan amount

A business loan can provide a more significant loan amount compared to a consumer loan. For example, a small business loan may reach up to ₱10,000,000.

4. Interest rate

A business loan’s approval process is more thorough, giving lenders more confidence to provide lower interest rates than consumer loans.

Advantages of Business Loans

  • Separate finances – A business loan will aid personal protection and tax duties by separating your business finances from your personal finances.
  • Limited liability – In case of default or inability to pay, your liability with a business loan may be more limited compared to a personal loan.
  • Business credit – Paying back your business loans on time will help increase your business credit score. This allows you to get higher loan amounts and better terms for future loans.

Risks of Business Loans

  • Personal guarantee – Some business loans may require a personal guarantee to reduce the lender’s risk.
  • Loss of business assets – You may lose business assets such as equipment, real estate, and receivables if you default on a secured business loan.

Consumer Loans

1. Eligibility requirements

A consumer loan typically requires applicants to have good credit, a stable source of income, and a good debt-to-income ratio. Applicants who do not have good credit may take out a secured loan that requires collateral instead.

2. Loan terms

Generally, consumer loans have a short payment term, ranging from a few months to years.

3. Loan amount

Consumer loan amounts tend to be smaller than business loans and rarely exceed ₱3,000,000. You will want to consider business loans if you need a more significant loan amount.

4. Interest rate

A consumer loan usually has higher interest rates compared to a business loan. As a result, it is considered riskier for lenders.

Advantages of Consumer Loans

  • Easy approval – Consumer loans have a short approval process, giving you quick access to funding. These loans require only a few paperwork and documentation from applicants.
  • Collateral workaround  Some small consumer loans may be unsecured, allowing you to withdraw a loan without collateral.

Risks of Consumer Loans

  • Personal risk – Consumer loans will be tied to your personal finances, putting them on the line if you default.
  • Ability to borrow – Lenders will not approve your loan if your debt-to-income ratio is not good. This may cause a problem if you incur outstanding debt and need another loan later on.

Get That Funding

Business loans and consumer loans each have their advantages and drawbacks. In the end, there is no one-size-fits-all solution for your funding requirements. Instead, consider all the factors and research carefully to determine what loan type best fits your business needs. 

If you’re looking for companies offering business loans with fast approval and minimal requirements, look no further than JK Capital. JK Capital provides small business loans that you can use to finance your expansion, working capital, inventory purchases, and other business-related expenses. 

Contact us today to secure business funding in 7 days or less.