The Difference of A Caveat Loan And A Personal Loan
Common sense dictates that when a business needs financing or loans, it should be sourced through a business loan application. However, the business owner also can apply for personal use and use the proceeds for his or her business. Similar to any other business decision, there are pros and cons to both methods. Before looking further, it’s important to evaluate your business and personal needs and examine the potential outcomes of each.
A business loan is a loan intended for a specific purpose relating to business operations or capital requirements. Business loans can be short-term or long-term in nature. Generally, short term business loans are used to finance working capital requirements such as making payroll, acquiring and maintaining inventory of raw materials and/or supplies or providing liquidity to trade receivables. On the other hand, long term business loans are generally used to finance capital requirements such as putting up a new store or buying new equipment.
Because business needs are so diverse, different loan options are offered to cater to specific requirements.
Business loans can be either secured or unsecured. Secured business loans have underlying collateral that the lender deems as an acceptable form of security to mitigate the risk of a borrower defaulting on required repayment(s). Unsecured business loans have no underlying security or collateral involved.
Caveat loans are a form of a secured business loan that is generally used for short term business loan requirements. They are covered by a Caveat Agreement. The term “caveat”, coming from the Latin term that translates to “let him beware”, means that a caveat acts as a warning for third parties that the lodging party (known as the “Caveator”), in this case, the Lender, has an interest in the land. A caveat prevents the owner of the land, who in this case is the Borrower, from transferring, selling, or otherwise dealing with the property without the prior consent of the Caveator or Lender.
A caveat can be lodged without the consent of the owner of the land (known as the “registered proprietor”), but the person lodging the caveat is liable for legal and financial penalties if a court finds that there is no “caveatable interest” (a valid interest). Therefore, the Caveator or Lender must exercise a large degree of caution before lodging a caveat. This should also always be lodged by a Solicitor who confirms that a caveatable interest exists.
A caveat can be removed by the consent of the Caveator/Lender, or by the registered proprietor lodging a “lapsing notice” which removes the caveat unless the Caveator appeals to the Supreme Court. A caveat used to protect a loan is generally most frequently removed once the loan has been repaid.
Personal loans are typically simpler than business loans. Personal loans can be used for various personal needs including buying a car, paying for hospital or education bills, etc. Using a personal loan for business needs is also acceptable to some lenders.
With a personal loan, your personal financial information will be reviewed, including your income and your credit history. Loans are generally unsecured, meaning you don’t need collateral or security. The loan amounts offered are generally lower than that of a business loan. The loan term typically ranges from 12 to 60 months.
One notable downside to a personal loan for business expenses, however, is that if your business fails to pay back the loan, you’ll be personally liable for the outstanding loan balance.
We established in the table above that both caveat loans and personal loans can be used for business. The key difference lies in the borrower entity facing the lender. For personal loans, it is a person who may or may not be a business owner. For caveat loans, the lender will put greater weight on looking into the business as an entity. The look into the business owner or owners may also be done by the lender as their need requires in the spirit of better due diligence.
When to use a personal loan?
It is best to use a personal loan for short term business loans requirements if a borrower has good credit and finances. However, the borrower should take note that personal loans may entail higher interest rates than secured business loans or other short term business loans.
When to use a Caveat Loan?
Applying for caveat loans from a caveat lender is recommended when you want to access lower interest rates and/or build up the credit history of your business. Even without an established track record of operations, the assurance of a caveat agreement underlying a secured business loan can help nudge the lender to make a favourable decision towards the borrowers business.
In the end, it is up to the business owner or decision-maker what method will best help his or her business requirements.