Business Loans vs. Personal Loans

Most businesses in Singapore will need to borrow money at some stage — in fact if you are growing faster than you expected, it’s basically a necessity. The reasons for borrowing money are as varied as the options for borrowing. Generally though, borrowing to grow your business will boil down to two options — taking out a personal loan, or taking out a business loan.Both types of loans can be used to finance your business, but each one has distinct advantages and disadvantages. The stress of making the right choice here is hard enough, so we want to arm you with all the right information to make sure you can make the right choice for you and your business. Read on to find out what is the smartest borrowing move for your specific situation.

Business Loans vs. Personal Loans in Singapore — What’s the Difference?

As we mentioned, both business loans and personal loans can be used to finance your Singapore business. They can both also usually be used to refinance and consolidate debt. There are however a few important distinctions between the two forms of loaning.

• While business loans may look at both your personal credit history and your business credit history, a personal loan will only look at your personal credit history.
• A business loan can only be used for the purposes of investing in your business and will be stricter in its purpose for borrowing. Generally though, you’d be borrowing for things like equipment, inventory, rent, and other investments in your business. While a lender for a personal loan may ask you what the money is for, they are less likely to be concerned about how you use the borrowed money.
• If take out a business loan, your business is liable for the debt. However if you use a personal loan for your business, it is you personally that is liable for the debt.
• Applying for a business loan can be a lengthy process with a lot of documentation needed. However a personal loan is usually much quicker and simpler to apply for and receive.
• Generally you can get a much larger sum of money through a business loan than a personal loan.
• A business loan’s term can range from six months to 25 years, while a personal loan’s term can range from two years to seven years.

There are of course exceptions to every rule, for example, a moneylender may have restrictions on what a personal loan can be used for, so be sure to read the fine print on the loan documentation.

What’s the Application Criteria in Singapore for a Business Loan vs. a Personal Loan?

Both business loans and personal loans will need you to have good credit, just like any other loan you can get in Singapore. Let’s dig down further though and look at the specifics of the criteria for each loan.

Business Loan Criteria

• You will need excellent credit.
• The moneylender may want to see both your business and personal credit histories.
• Show adequate revenue.
• Show that you’ve been in business for some time.
• More paperwork required, like proof of profitability.
• Show exactly what the loan is for and how you project it will help your business.
• You may be asked for your full business plan.
• Provide any legal documentation required regarding licences and permits for your business.

Personal Loan Criteria

• You will need good credit.
• You will need to have a steady income.
• You will need to adhere to Singapore’s Total Debt Servicing Ratio (TDSR) of 60% — i.e. your debts can only total 60% of your gross monthly income.
• If you have poor credit and apply for a personal loan from a bank, your loan will have to be secured against something you own, e.g. using you house or car as collateral.
• If you have poor credit and apply for a personal loan from a registered money lender, you might not have to provide collateral, but your interest rates may be higher than usual.

What Are the Advantages of a Business Loan vs. a Personal Loan?

Now that we’ve sorted out the differences and criteria for each type of loan, let’s take a look at the advantages each loan has for your Singapore business.

Advantages of a Business Loan in Singapore

• You can keep your business and personal financial affairs separate. This is a huge bonus in terms of saving time when it comes to Singapore tax return season. It also should save you some money with your tax deductions.
• You’ll be able to build your business credit rating by proving to future lenders you can be trusted to pay off debt reliably.
• Your interest rates will generally be lower with a business loan, some times up to half that of the interest rate for a personal loan.
• You will be able to limit your liability if you default on the loan, as the loan will be under your business name, not your personal name.
• A business loan will allow you to borrow more money than a personal loan.

Advantages of a Personal Loan in Singapore

• You will generally get your money faster with a personal loan vs. a business loan, as there is less paperwork to fill out and process.
• A personal loan is generally easier to approve than a business loan. This is especially the case if you haven’t been in business for long.
• You generally won’t need to provide collateral for a personal loan, provided you have a decent credit history.

Scenarios for Business Loans vs. Personal Loans in Singapore

Let’s take a look at possible scenarios, and what kind of loan would suit those particular needs.

You Have Not Been in Business for a Long Time

Assuming you have good personal credit, you may want to go for a personal loan for your new business. Given that you have good credit, you should qualify for reasonably low interest rates, without providing collateral. With a personal loan, you also won’t have to provide as much paperwork which is an advantage for a new business that probably won’t have too much in terms of credit history and other documentation.

You Have Been in Business for a Long Time

If your business has good credit, you might want to consider a business loan, as you’ll be able to demonstrate to your lender that you can pay off any debt in a reliable manner. If you are an experienced business owner, you probably already have most of the paperwork on hand, so the process shouldn’t be too daunting.

You Need Money for Your Business Fast

If you have an emergency debt you need to pay off as soon as possible, a personal loan will nearly always be quicker both in terms of applying and receiving your money. This is because the loan terms are less strict, and there is less paperwork for the lender to process. Just make sure the interest rate is something you can handle.

You Have Bad Credit but You Still Need a Loan for Your Business

If you have bad credit, either in your personal history or your business history, you might be out of luck in getting a loan from traditional financial institutions like banks. All is not lost however, as there are many registered moneylenders in Singapore that are becoming more and more competitive in both their terms and interest rates. Check out our application form here to have our registered moneylender partners compete to give your their best offer.

Next Steps — Finding the Right Loan for Your Singapore Business

Figuring out whether you should get a business loan or a personal loan for your operation can be a lengthy process, and should always be given thoughtful consideration. In saying that, we certainly hope we’ve given you a much better idea of the pros and cons of each kind of loan, and that you now have the information you need to make an informed choice.At SMEGuru, growing small to medium Singapore businesses is both our job and passion — if you have any questions about what you’ve read in this article, please do feel free to contact us, we’d be happy to help you.