Both micro loans and personal loans can offer entrepreneurs a quick way to raise cash for their businesses. These sources of credit have several characteristics in common. You do not have to go through a complicated process of reviewing your credit or providing tons of documents to obtain either a microcredit or a personal loan.

In addition, these loans generally must be repaid relatively quickly.

However, there are also differences. Usually, an entrepreneur will use the funds of a microcredit 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 examine these two types of loans in detail and see which one suits you best as a business owner.

A micro loan is a commercial loan for an amount that could be between $ 5,000 and $ 50,000. Some financial institutions provide microcredits for even smaller amounts. If you have started your business recently or have difficulty raising capital in larger amounts, a microcredit can provide you with the funds you need.

A personal loan is different. When you apply for this type of loan, the lender will probably not 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 your personal income.

If you have a poor credit score or an income level that does not meet the lender’s requirements, you will be less likely to get a personal loan.

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

Micro loans

⇨ Micro loans are generally for a sum of up to $ 50,000. The average amount of a microcredit is $ 13,000.

⇨ Microcredit funds can be used for working capital, equipment purchase or inventory purchase. Micro loans can also be used for other commercial purposes.

⇨ The interest rate of a microcredit is usually higher than the rate of a regular commercial loan.

⇨ The lender may require collateral, both in the form of your company’s assets and personal assets.

⇨ These loans are aimed at borrowers who require few funds.

⇨ A personal loan can be used for almost any purpose. The lender will not monitor how you use the funds it provides.

⇨ These loans generally do not require you to present collateral.

⇨ If you have a low credit score, your personal loan application is unlikely to be approved.

⇨ Personal loans generally do not exceed $ 50,000. However, it is possible to obtain a loan for a sum that is significantly greater. You could even get a $ 100,000 personal loan: it depends on your income level and your credit score.

⇨ Interest rates on personal loans can vary from 5% to 23% or even more. The rate will depend on your credit score.

This diagram will help you compare the characteristics of a personal loan with those of a microcredit:

When should you use a microcredit and when should you use a personal loan?

If your business needs funds quickly to cover an unexpected expense, should you use a microcredit or a personal loan? To answer this question, you must consider several factors.

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

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

Here are some scenarios in which a microcredit would be preferable to a personal loan for your business.

Use a microcredit when:

⇨ You need a small amount for your business and you are sure you can return it in a few months.

⇨ You want to build your business credit history .

⇨ You do not qualify for a traditional loan from your bank.

Use a personal loan when:

⇨ You have a high credit score and sufficient personal income.

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

⇨ You are confident that you can separate your company’s income from your personal transactions when the time comes to prepare your financial statements.

So what is the best option as a small business owner?

If your company requires funds as soon as possible to buy inventory or to upgrade its equipment, a microcredit from Pabanelas Financial could be your best option. The evaluation procedure we use for our borrowers has been designed following our motto: We do not close the doors to any business. Our requirements are more flexible than those of most lenders.

It’s easy to qualify for a microcredit from Pabanelas Financial:

⇨ We do not request a minimum credit score (VICO).

⇨ Even applicants without a credit history can receive a loan.

⇨ If your company has been established recently you could qualify for a loan from Pabanelas Financial: you must have been operating your business for only nine months.

⇨ Your annual gross sales must be at least $ 30,000.

⇨ We do not ask for a guarantee.

We offer micro loans for sums of up to $ 75,000, and there are no penalties for prepayment if you wish to repay your loan earlier than agreed.

If you need funds for your company, request your loan with us now. Completing the form will only take a few minutes, and you will know immediately if you prequalify. Soon after, one of our loan specialists will contact you to guide you through the loan process. You could have the funds you need in a matter of days!