On the surface, the terms ‘personal loan’ and ‘business loan’ seem easily distinguishable. You’d assume that you’d use the former for personal needs and the latter for business needs, right?
Unfortunately, that’s not quite the case.
There is some overlap between how you can use these two popular loan types. In this article, we help you understand the main similarities and differences between personal loans and business loans. Read on to get all the knowledge you need to make the right decision, get the best rates, and fulfil your financial obligations.
Business loan vs personal loan – the similarities
The main reason for the overlap between a business loan and a personal loan is that personal loans are so versatile. A bank or a reputable licensed moneylender will give you the option to use personal loans for almost any reason.
While the most popular of these reasons are medical emergencies, wedding expenses, and vacations, some borrowers may also use them for their business needs.
For example, a business owner may be short of funds to pay their staff and will need to borrow money to cover it. Therefore, the personal loan in this case is used to cover a business expense. Alternatively, a start-up may just need additional cash flow while it finds its footing. It is the more attractive option because it is usually approved more quickly. We touch on the reasons for this below.
The repayment period for any type of loan depends on the loan capital and the applicant’s credit history. (In the case of business loans, this would depend on the creditworthiness of the company). It does not vary by the type of loan.
The interest rate charged by a licensed money lender depends on the creditworthiness of the borrower. A person or business will be eligible for lower interest rates if they have a proven track record of repaying their loans on time, have not defaulted on previous lines of credit, and have maintained a reasonable level of credit utilisation.
Business loan vs personal loan – the 7 main differences
Here is a comprehensive look at the main differences between personal and business loans.
Any legal resident of Singapore may qualify for personal loans. On the other hand, you need to have a business that is officially registered in Singapore to qualify for a business loan from a bank or licensed money lender. You may also have to prove ownership or co-ownership of the business.
How the loan may be used
A personal loan may be used for a very diverse range of purposes. Meanwhile, a business loan may only be used for expenses directly related to the business. While the former can be used for business expenses, there are restrictions on using the latter loan type for personal expenses.
Upper and lower loan limits
The upper limit on both personal and business loans is determined by your current financial status, credit history, and credit utilisation. While personal loans may be as small as a few hundred dollars, business loans are usually larger, in the range of thousands of dollars.
Impact on credit score
Both personal loans and business loans taken in your name have an equal impact on your credit score. However, you may also obtain business loans on behalf of your business. In this case, a default affects the business rather than you. However, keep in mind that your credit score is damaged if a business you own goes bankrupt.
The application process and documentation
The process of obtaining personal loans is very straightforward. You simply present your personal details against which the lender checks your credit availability. This applies to both banks and licensed money lenders. With business loans, the lender will require you to furnish documentation such as proof of ownership (or co-ownership), business account balance, and even business plans.
Personal loans in Singapore are almost always unsecured, meaning that the applicant does not have to put up an asset as collateral. On the other, a licensed moneylender will likely ask for collateral for a business loan, especially for larger loan principals. Collateral can include real estate, vehicles, stocks, and even insurance policies. However, institutions do offer unsecured business loans as well.
Terms and conditions
The terms and conditions attached to a loan are closely aligned to the credit score of the applicant or the business. However, business loans may also include performance-based clauses, for example, a minimum turnover within a stipulated time frame. These clauses make business loans stricter than personal loans.
Here is a summary of these differences.
|Factor||Personal Loan||Business Loan|
|Eligibility||Individuals||Individuals or businesses|
|Purpose||Personal or business use||Business use only|
|Limit||Usually lower||Usually higher|
|Credit score impact||Personal||Personal and business|
|Documents||Personal ID and credit report||Personal ID and business information|
|Collateral||Unsecured||May require collateral|
|Terms||Standard||May be performance-linked|
Government business loans – who are the providers in Singapore?
Two business-specific loans have been introduced by the government – the SME Working Capital Loan and the Temporary Bridging Loan. Both are available through all major local banks and lending institutions. To qualify, your business must be at least 30% Singaporean-owned.
The SME Working Capital Loan is available to businesses that employ fewer than 200 people. Interest will be based on an assessment of the business. It is limited to S$300,000 until 30 September 2022. Thereafter, it will be raised to S$500,000 until 31 March 2023. The Temporary Bridging Loan can be as large as S$1 million and is independent of company size. This is available until 30 September 2022.
Do note that both of these loans must be repaid within 5 years.
If you’re running a business and need additional cash flow or require a loan for personal emergencies, consider MM Credit’s services. It takes just seconds to fill in this form and you’ll receive a quote from this licensed money lender in no time.