The need for money in businesses to sustain growth is a common phenomenon. Especially if your business is an SME (small and medium enterprises), the need for additional working capital can be frequent.
When the need for money arises in any business, there are many choices to choose from. The funding options include borrowing from family, a cash advance on a credit card, or a traditional loan from a bank and so on. Among all those funding options available in India, the most preferred one is a business loan from banks.
Business loans can be availed from many sources such as non-banking finance companies (NBFCs) and private money lenders. However, a business loan from any institution comes in two prime categories- Secured business loan & unsecured business loan. One of the main decisions regarding a business loan is making a choice between a secured business loan and an unsecured business loan.
Secured Vs Unsecured Business Loan
What is a Secured Business Loan?
A secured business loan is a kind of credit availed from the financial institutions which are backed by some collateral as a security against the funding provided. The loan is provided only when the borrower hypotheticates a financial asset to the lender. The credit amount one can get depends on the market value of the asset that has been hypothecated by the loan seeker. As long as the loan repayment will be progressing, the lender will have rights on the asset. The hypothetication ends only when the loan repayment is done in full. Getting a business loan is easier if you can offer security against your loan.
What is an Unsecured Business Loan?
An unsecured business loan is a business credit which is offered to a borrower depending on the credit rating and the repayment capacity of the loan. In this type of credit, none of the assets of the loan seeker is collateralized for the approval of the loan. The creditworthiness of an unsecured business loan depends on the operational history of the business, the profit and loss statement of past years, the business credit history, the loan seeker’s personal credit history etc. An unsecured business loan can easily be availed through digitally operating NBFCs which are known as FinTech companies.
Which is Better: Secured or Unsecured Business Loan
Both kinds of business loans can make you fulfill the need of the business. But it is not only the destination which we are to take care of, but we must also think of the way we are selecting to reach our destination and what can be the consequences of the same. Both secured and unsecured loans have pros and cons. Before you opt any of it, let’s find one which one is ideal for your SME.
Why Should You Opt For a Secured Business Loan
- The chances of getting approval are always high when you opt for a secured loan. As the risk factor is low at the lender’s end, they easily provide you with a secured business loan.
- The low-interest rate is the next advantage of opting for a secured business loan. The interest rate of a secured loan is considerably low as compared to the unsecured business loan.
- A secured business loan can be availed even if your credit score is not up to the mark.
- The collateralize property may it be your residential property, business equipment or the inventory, can be used by the borrower as it was used before the loan. The lender will require only the mother deed of the property. As soon as the loan will be paid off, the lender will give you the property documents.
- Most of the secured business loan lenders offer top-up loans on the existing loan. A top-up facility makes a borrower get additional financial support any time during the loan repayment is in progress.
Why Should You Opt For an Unsecured Business Loan
- If you need money for a short term, an unsecured business loan will be a better option. Unlike secured business loans, one can become debt free sooner if opted for unsecured business loans.
- The next advantage of availing an unsecured business loan is the online transaction. An unsecured business loan can easily be availed through a Fin-Tech company which saves a lot of time and effort one has to put while availing a secured loan from a traditional bank.
- If you are in an urgent need of money, an unsecured business loan is the one which can help you out. An unsecured business loan can be disbursed within 3 to 5 days. But if you want to avail a secured business loan, it will take a minimum of 10 to 15 days a lot of verification is done in before granting a business loan.
- Unlike a secured loan, if you apply for an unsecured business loan, none of your personal or business assets will be at risk.
- The repayment options are more flexible in unsecured business loans issued by Fin-Tech. One can make pre-closure or part payment with nominal charges.
As we have seen both the loan options have their advantages and disadvantages, the selection should be done according to your need and the circumstances. If you want a long term loan and have assets to use as collateral, you can surely go for a secured loan. On the other hand, if you want a short term loan with better flexibility, an unsecured loan will be a better option. So review your needs once again and make informed decisions to enjoy the maximum benefit from the credit.