Pros and Cons of Using Personal Loan for Business

We often hear that a personal loan can tarnish your credit score, affect your financial status, and more. However, there’s an essential point to understand: people typically don’t apply for personal loans if they are inherently wealthy or can easily obtain money from family or other sources. Therefore, in certain circumstances, applying for a personal loan is understandable—and one such scenario is starting a business.

Starting or growing a business requires money, and sometimes a significant amount of it. It’s no surprise that you might need a five-figure sum to get your business off the ground.

This is why many Malaysians wonder whether applying for loans is a good strategy to kick-start their business and, if so, whether they should opt for a personal loan or a business loan. This decision should not be made overnight, as both options have their pros and cons.

Now, let’s delve into the simple pros and cons of each option to help you decide what might work best for you and your business:

The Good Side of Personal Loans for Business

1. Easy To Get

Personal loans are pretty straightforward. Banks or lenders don’t ask for too much paperwork, and they mainly look at your personal credit score (how well you’ve handled money in the past) to decide if you qualify. Bonus points to those who worked in the government sector – as the process for them to apply for personal loans is so much easier to approve.

2. Quick Money

If you’re in a hurry to get cash for your business, personal loans can be a lifesaver. They can get approved fast, sometimes immediately, which is great for urgent needs. So not only for startups, if you are currently a business owner and you’re having a difficult time, a personal loan might be your fastest way to salvage your business – to fund your strategy change or others.

3. Friendly for New Businesses

For those just starting out or running their business alone, getting a business loan can be tough because banks often want to see a track record. Personal loans are easier in this case because they focus more on the individual than the business history.

The Downsides of Using Personal Loans for Business

1. Higher Costs

The catch with personal loans is that they might cost you more in the long run. Interest rates (the extra money you pay back on top of what you borrowed) can vary greatly, sometimes reaching up to 24% a year in Malaysia. This contributes to the statistics of personal loan being the highest cause of bankruptcy last year.

2. Limited Money

There’s a limit to how much you can borrow with a personal loan, usually not more than RM200,000. This might not be enough for all your business needs, especially if you want to invest or expand.

The Good Side of Business Loans

1. Lower Costs

Business loans often come with lower interest rates, making them cheaper over time. This is especially important for larger amounts or longer loan periods.

2. More Flexible Options

With business loans, you might get access to different types of borrowing options that suit your business needs better, like credit lines or overdrafts, which let you borrow and pay back flexibly. This pretty much offers you some space in terms of paying back.

3. Government Support

The Malaysian government offers special loan schemes to help small and medium businesses grow. These can be a big help if you struggle to find affordable financing. Some government entities that offer this kind of loan/subsidy include MARA, TEKUN, SME Bank, CGC, and others. Other than that, there are some government incentives from the 2024 Budget that might benefit local entrepreneurs, such as digital grants.

The Downsides of Business Loans

1. Harder to Qualify

Business loans entail stricter requirements. Your business might not qualify if it’s too new, operates in a sector the bank deems risky, or seeks the loan for purposes the bank doesn’t endorse. Convincing banks to approve your loan can be challenging without a solid business model. Additionally, it’s crucial to be thoughtful in presenting your business, as your application may be rejected due to a lack of a comprehensive business plan or perceived industry risk.

2. Risk of Losing Assets

Most business loans require collateral, meaning you must pledge something valuable (such as property) to the bank. If you fail to repay the loan, the bank could seize this asset. Consider a scenario where a significant portion of the capital borrowed from the bank is used to purchase an office unit or shop lot for your business – it would not bode well to lose such an asset due to an inability to fulfill the loan obligations.

3. Shorter Payback Time

Business loans often need to be paid back quicker than personal loans. This could mean higher monthly payments, which might be a strain on your business cash flow.

Which Loan is Right for You?

Your choice depends on your situation:

• Personal loans might be better if you’re starting, need money fast, and don’t need a huge amount. They’re simpler and quicker to get but can be more expensive.
  
• Business loans are worth considering if your business is more established; you can wait a bit for the money, and you need a larger amount. They offer better rates and more flexibility but come with stricter requirements.

Conclusion

Choosing the right type of loan for your business in Malaysia depends on many factors, including how much money you need, how quickly you need it, and the stage of your business.

Both personal and business loans have pros and cons, so it’s important to weigh these carefully. Always consider the long-term impact on your finances and, if possible, talk to a financial advisor to make the best choice for your business’s future.

Now, we have a bonus for those who read this article to the very end. What if you could secure the funds you need without the drawbacks of a personal loan?

Imagine accessing substantial capital without borrowing from banks, living the next decade free from the worries of personal loans or any other financial commitments.

Certainly, after reading about the pros and cons above, you may have reservations about securing a ‘better’ loan. However, we’ve assisted and consulted with more than 20,000 Malaysians on enhancing their financial well-being. Some have even halved their financial obligations using our recommended strategies!

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Ready to take the next step, or seeking more personalized advice? Reach out to us HERE and speak to our Success Managers. Our experienced experts are always willing to assist.

We hope this article has been insightful, and we’re excited to help you achieve your goals. Feel free to share this article with others who might benefit from it as well.