There are some people who are born with an entrepreneurial spirit. In spite of that, they sometimes find themselves stuck in a desk job as they lack the courage to turn their dreams into reality. This is understandable as starting and running a business can be both exciting and terrifying.
However, Malaysians can take encouragement from the fact that the local startup scene is supported by several government agencies, venture capitalists, and accelerators such as MaGIC, MTDC, MDeC. Furthermore, we can take encouragement from the fact that ASEAN is the fastest-growing internet market on the planet and the world’s sevent- largest economy.
One of the biggest challenges facing aspiring entrepreneurs during the early years is coming up with money and capital. That’s where loans come into play. But if you are planning a small business, what type of loan gives you more benefits? Below, we try to make the distinction between business loans and personal loans.
The case for a business loan
This is the default route people think of when starting a business. After all, the specific purpose of this type of loan is to finance businesses. But is it actually the best option? First, let’s take a look at the pros and cons.
Advantages:
- Relatively low-interest-rate – The average interest rate for business loans in Malaysia is between 5% to 10%. The advantage of low-interest rate is obvious as it keeps your costs low.
- Overdraft loan – This is a line of credit that becomes available when you make any withdrawal for an amount greater than the balance in your business debit account. You can continue making withdrawals even if the account is empty, giving you flexibility in your cash flow.
- Revolving credit — A line of credit where the customer pays a commitment fee and is then allowed to use the funds when needed. It usually is used for operating purposes and the amount drawn can fluctuate each month depending on the customer’s current cash flow needs.
Disadvantages:
- Not all types of businesses qualify – There is a stricter evaluation process.
- Requires collateral – Although some business loans waive this requirement, they are in the minority. This is a risk to the customer especially if the collateral is a personal asset like a home or land.
- Short financing period – for such large financing amounts, the financing period is relatively short at five to seven years.
The case for a personal loan
So, is a personal loan the better option? First, let’s examine the pros and cons.
Advantages:
- Easy to apply – Compared to business loans, there are less required documents. Moreover, the evaluation process is easier.
- Shorter approval period – There are plenty of instant approval loans offer by financial institutions. You can even get your results on the spot. The is perfect if you require immediate cash.
- Suitable for startups –Most business loans require the company to already be operational for a few years.
Disadvantages:
- Higher interest rates – this is especially true if it an instant approval loan
- Lower financing amount – the maximum financing amount rarely exceeds RM200,000
So, which do you actually choose?
In conclusion, a business loan is more suitable in the following situations:
- Your business has been operational for a while and is stable
- You do not require immediate cash
- You need a high amount of financing
On the other hand, a personal loan is more suitable in the following situations:
- You are a startup or in the early phases of business
- Require immediate cash
- Do not require a high amount of financing
- Do not want to go through the hassle of preparing multiple documents and requirements
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