Both microloans and personal loans can offer entrepreneurs a quick way to raise money for their businesses. These sources of credit have several features in common. You don’t have to go through a complicated credit review process or provide tons of documents to get either a microcredit or personal loan. In addition, these loans generally have to be repaid relatively quickly.

However, there are differences between micro credit and personal loan.

Typically, an entrepreneur will use micro loan for commercial purposes. A personal loan, however, can be used for virtually any purpose. Of course, you can also use it for your business.

Let’s understand these two types of loans in detail and which one is best for a business owner.

Difference between micro loan and personal loan?

A microloan is a commercial loan with a fixed amount. Some financial institutions provide microloans for even smaller amounts. If you have recently started your business or are having difficulty raising larger amounts of capital, a micro credit can provide you with the funds you need.

A personal loan is different. When you apply for this type of loan, the lender probably won’t make a credit decision based on the performance of your business or the cash flows it generates. Instead, the financial institution will consider two other factors: your personal credit and income.

If you have a low credit score or an income level that doesn’t meet the lender’s requirements, you’ll have less chance of getting a personal loan.

Features: Micro Credit and Personal Loan

Here’s a list of the main features of these two types of loans:

Micro Finance

(1) Microloans have fixed cap.

(2) Microcredit funds can be used for working capital, purchase of equipment or purchase of inventory. Microloans can also be used for other commercial purposes.

(3) The interest rate of a microcredit is usually higher than the rate of a regular commercial loan.

(4) The lender may require collateral in the form of both business assets and personal property.

(5) These loans are aimed at borrowers who require small amount of finance.

You may also like: Benefits of business credit cards

Personal Loans

(1) A personal loan can be used for almost any purpose. The lender will not validate how you use the funds it provides.

(2) These loans generally do not require you to present collateral.

(3) If you have a low credit score, it is unlikely that your personal loan application will be approved.

(4) Personal loan amount depends on individuals’ income level and credit score. However, it is possible to get a loan for a significantly larger amount.

(5) Interest rates on personal loans can range from 14% to 23% or even more. The rate depends on borrower’s credit score.

When to use a microcredit or personal loan?

If your business needs money quickly to cover an unexpected expense, should you use a microcredit or personal loan?

To answer this question, you’ll need to consider several factors.

As a general rule, it is not a good idea to treat your company’s money and personal funds in a similar way. Mixing your personal finances with those of your company is risky and should be avoided as much as possible. If you use a personal credit card/loan for business, the complications can be even greater.

There is another angle to consider. If you opt for a personal loan to invest in business, the funds you can get may be limited and may not be able to cover the amount you need. This is because the lender will set a personal loan limit based on your personal income and credit score, not on your company’s potential.

Use a micro credit when:

Here are some scenarios where a micro loan would be preferable to a personal loan for business.

(1) You need a small amount for your business and you are sure you can pay it back in a few months.

(2) You want to build business credit history.

(3) You don’t qualify for a traditional loan from bank.

Check out: 7 ways to use micro loan

Use a personal loan when:

(1) You have a high credit score and sufficient personal income.

(2) Your business is new and you cannot provide the lender with the documentation requested for a commercial loan.

(3) You trust that you will be able to separate business income from personal transactions when it comes time to preparing for financial statements.

So what’s the best option as a small business owner?

If your business requires funds as soon as possible to purchase inventory or upgrade equipment, a microcredit may be your best option as that’s what their objective is. The application procedure used by lenders is designed with the motto of to grow every business.