The way businesses borrow funds to finance the operation cost or expense of their business is basically different from the way consumers borrow funds to be able to make purchases or pay off unexpected bills. See www.forbrukslån.com. Although several purchases may be alike, like purchasing a property, the terms and conditions concerning a business loan differs greatly from that of a consumer loan.
The Difference Between Consumer and Business Loan
A consumer loan is when an individual borrows secured or unsecured funds or money from a lender. Consumer loan includes credit cards, mortgages, home equity lines of credit, refinances, auto loans, student loans, as well as personal loans
A business loan, on the other hand, is a loan particularly meant for business reasons or purposes. Similar to other loans, it entails the generation of a debt wherein it will be paid back together with interest. Business loan includes microloans, invoice financing, mezzanine financing, bank loans, asset-based financing, cash flow loans, as well as business cash advances.
Collateral or Asset
Typically, both consumer loans and business loans necessitate collateral, also called assets, for the purpose of securing or protecting the loan. The collateral for both loans may include investments or real estate. Moreover, a business loan may possibly be collateralized by furniture and fixtures, equipment or inventory. Besides safeguarding the business assets, a business loan may necessitate the owner of the business to also make their personal assets available.
Usually, a consumer loan doesn’t necessitate a guarantor to be able to take out a loan. A guarantor is an individual who guarantees or assures that the borrower will pay back the money borrowed. In the event that the loan isn’t settled by the borrower on the agreed schedule, the bank or the lender could legally go after the guarantor who signed the loan for payment. For a business, when they apply for a loan, the business owners typically need to sign themselves as guarantors. By doing so, their personal assets as well as their business assets are placed at risk.
Frequently, a consumer loan will necessitate pay stubs, a credit report, or tax returns. For business loans, the business’ credit reports will be evaluated. Furthermore, businesses taking out a business loan will be obligated to supply financial statements for the last three years. Financial institutions oftentimes need these financial statements to be compiled and documented by a certified accountant. Additionally, tax returns as well as duplicates of contracts with suppliers, merchant and customers may be a requirement as well. Generally, the needed documentations for a business loan to be granted transcend what is necessitated for a consumer loan.
Typically, business loans have a term that is shorter with the inclusion of a greater interest rate compared to a consumer loan. At times, this could hinge on how long a business has operated and the available quantity of collateral for the loan. If an inventory is the only thing that secures a business loan, the loan will have a shorter term and will have an interest rate that’s higher compared to a business loan wherein it is secured by an asset that’s of more value such as real estate. Furthermore, certain business loans are callable loans wherein banking institutions are at a particular time permitted to call the loan due. If the loan is called due, it is a must for the borrower to settle the full remaining loan amount.