Differences Between Business Loans and Consumer Loans: Our Experts’ Comments

Businesses acquire funds to cover their operating costs or expenses in a way that is fundamentally different from how consumers borrow funds to buy stocks or clear off pending debts.

Business and consumer loans are two different capital plans used to fund various activities. Enterprise loans work similarly to personal loans, although they are more like issuing corporate bonds. There are many avenues to get these loans, but it’s advisable to do due diligence before choosing a loan company. This is why many individuals and firms visit comparison sites like laina-finance.fi before making a choice.

Business & Consumer Loans

A consumer loan is an authorized loan taken by an individual body from a lender, like Estateguru. Personal loans, student loans, mortgages, credit cards, home lines of credit, auto loans, and refinances are all examples of consumer loans.

A business loan or commercial loan, in contrast, is a loan that is specifically intended for business needs taken from a loan company such as Yritysluotto.fi. Bank loans, microloans, asset-based financing, mezzanine financing, invoice financing, cash flow loans, and business cash advances are all examples of business loans.

For further context, here are 5 major differences between them.

The Use of Standby Guarantor

In most cases, a personal consumer loan is not bound to present a guarantor first for approval. A guarantor is a person who promises or ensures that a primary applicant will repay the money borrowed. If a particular borrower fails to pay back on the agreed-upon timeline, the bank or lender may legally pursue whoever stood as a surety for the loan repayment.

Thus, when a firm applies for a business loan to finance a real estate investment from a loan company, the owners are usually required to name themselves as guarantors. Their personal, as well as commercial assets, are put in danger as a result of this. This point here ultimately directs us to number two.

Asset and Collateral Declaration

Collateral, also known as assets, is typically required for consumer and commercial loans to secure or safeguard the loan. This collateral may include landed properties, real estate, long-term investments, and documents of interest to the federal government or state.

Furthermore, furniture and fixtures, equipment, and inventory may be collateral for a business loan. A business loan may demand a declaration of assets to make personal assets available in addition to the company’s assets. The idea is to impose the necessity to clear off loans when taken and avoid the likelihood of default payments leading to corporate disputes. Hence, most financial institutions put platforms to aid the easy transaction of loans against assets.

Provision of Financial Documents

 According to individuals who have accessed consumer loans  and other similar credit institutions, the most common documents lending companies requests from borrowers are bank statement, tax returns sheet, or payroll list. Credit records for the individual are also likely to be cross-checked over six months.

This is also the case with business loans, but it comes with some additions. The credit institution will also ask a company to provide financial accounts for the previous three years. Financial institutions frequently demand that these statements be prepared by the individual’s account officer or a legal practicing accountant. It’s also possible that work history, side businesses, and documents of retailers, suppliers, and customers will be necessary.

A corporate loan often requires far more documentation than a consumer loan. A lender for a commercial loan could easily require a view of your business strategy because the possibility of being in debt for a long time depends on the company’s plans for the future.  

Terms and Payment Structure

When outlining the differences on this point, corporate loans typically have a shorter duration and a higher interest rate than consumer loans. 

This factor may be contingent on the length of time a company has been in operation and the amount of collateral available for the loan. Suppose a business loan is secured solely by inventory. In that case, there’s a limited time frame for repayment and a higher interest rate than a credit attached to a bigger asset like real estate.

Interestingly, available loans with set reminders allow lenders to call the loan due at a specific period. In cases of the past due date, the borrower must pay it back immediately in full, whether it’s an installment plan or not.

Financial Report and Follow-up

For consumer loans, the lending company usually doesn’t need to follow up after the disbursement of funds as long as the installments are completed on time.

On the other hand, lenders frequently conduct annual assessments of the relationship with business loans. Many credit companies will need monthly financial reports to be submitted for examination. This report comes in handy to prevent business concerns that jeopardize the loan repayment terms.

The Bottom Line

While consumer and business loans are different in terms of technicalities, they serve the same purpose — helping an individual or a business alleviate financial difficulties.

However, it is generally important to carry out extensive research and take a good look at your options before applying for a loan as an individual. Also, as a business, it’s essential to speak with your finance department or accountant to establish what is best for your firm if you want to take a loan to address any financial difficulty.