If you are a professional, such as a lawyer, chartered accountant, architect or doctor, wanting to start your own practice or expand an existing set-up, and are looking for funds, professional loans can come in handy. These loans specifically target professionals who need money to start or expand their business.
“Professional loans are a subset of business loans, and they are offered separately so as to cater to specific set of customers with specific requirements and eligibility criteria," said Navin Chandani, chief business development officer, BankBazaar.
While you can also use a personal loan for business purposes, it is primarily taken for personal purposes like wedding or travel. Professional loans, on the other hand, are meant to be utilized for business purposes only.
So how do you decide which is the right loan for you—professional, personal or business?
How to choose
Before deciding which loan you want to take for your business needs, assess which bank offers what rates and terms and accordingly make a decision.
You can opt for a business loan if the investment amount you need is higher. However, if you have a good credit score and are eligible for a personal loan, then you might be able to get a loan for as low as 10.75%, the lowest rate among the three.
Remember that not all professionals can get a personal loan as most of them do not draw regular salary from an employer and, hence, are not eligible. But if you are a salaried individual and have a private practice—say a doctor who is employed at a hospital and also has a private clinic—you may be eligible for a personal loan.
If you don’t meet the criteria for personal or business loans, professional loans are the only option left with you.
The interest rates for professional loans in most banks are in the range of 12.75-18% per annum, while that for personal loans are in the range of 10.75-24% per annum. Business loans are an expensive proposition and its interest rates are in the range of 13-22% per annum. Also, unlike professional loans, business loans are secured loans, which means you need to provide a collateral against the loan you are taking.
“A professional needs to do a thorough comparison of loan offers from different banks on parameters like rate of interest, processing fees, prepayment penalty charges, lock-in-period, tenure, etc. before choosing the right loan. In cases where the professional is salaried as well as running his own practice, he might also want to compare professional loan offers to personal loan to identify if he should opt for a personal loan or a professional loan," said Gaurav Gupta, co-founder and chief executive officer, Myloancare.in, an online lending platform.
If you need a higher amount of loan, compare the rates of professional loans and business loans and see which terms suit you better. “Usually, professional loans would be charged slightly lower interest rates compared to generic business loans. Maximum repayment tenure is generally 60 months, though some banks also offer 84 months or more repayment period to customers," said Chandani.
Keep in mind that to obtain a professional loan, there are other conditions that you would need to meet. You would need to give proof of holding a professional diploma or degree or proof of the fact that you are professionally qualified or hold the necessary skills to practice such a profession.
“If the loan is intended to start an independent practice, then the borrower would require at least 4-5 years of experience. If you already have a practice running, the business run by the applicant should have a minimum annual income of around ₹1 lakh and should have been making a profit for the last two years. Individuals, partnership companies and firms, and proprietorships can all apply for this type of loan," said Chandani.
However, the terms and conditions might differ from bank to bank and person to person.
Things to remember
If you are someone who is just starting a professional career and want to have a private practice in future, it is recommended that you plan your finances in such a way that you don’t have to take any loan.
“If you are looking at starting your own practice in 4-5 years, then you should put money in fixed income mutual funds or medium term mutual funds. Build the corpus through these funds and once the goal is met, use that to buy an office space or whatever else you need it for," said Deepali Sen, founder of Srujan Financial Advisers LLP.
If the goal is, say, seven years away, you can put the money in equity funds as well. The money should be at least six months of your business expenses. Also, if you get a windfall gain, say, from the current practice that is doing well or you get a bonus, invest that money too and meet your goal before time, added Sen.
While having an own business set-up is a dream come true for many professionals, ensure that this goal doesn’t take precedence over other financial goals.