Businesses often need to opt for loans to mitigate their different expenses. When they look to avail funds for their business, they should figure out whether to choose unsecured business loan or secured business loan. The latter has simpler eligibility criteria, high borrowing limit and lower rate of interest. However, lenders can repossess their asset/security in the situation of loan default. On the other hand, businesses do not require providing any security/collateral to avail an unsecured business loan.
Read on to understand the difference between secured business loan and unsecured business loan.
What is a secured business loan?
Secured business loan is a credit option through which businesses can borrow a specific loan amount. And against the loan proceeds, they require providing a security or collateral to lenders, generally in the asset form. Opting for secured business loans helps businesses in borrowing higher loan amounts at lower rates.
What is an unsecured business loan?
Unsecured business loans can be availed without pledging any collateral or security to the lender. Generally, owing to their unsecured nature such loans come with lower loan amount and higher interest rate than secured loans because lenders hold limited ways to meet their losses in situations of any default by the business.
Secured business loan vs. unsecured business loan – Which one is better?
- Collateral requirement
Collateral is a high value asset that serves as security for business loans. Opting for a secured business loan makes it mandatory for the business to provide an asset like property, land, or equipment as collateral to the lender. Unsecured loan options, on the other hand, do not require any security or collateral. The biggest benefit of unsecured loan is that, businesses can avail loan proceeds instantly based on their good credit history and stable income with zero collateral.
- Interest rate
One of the benefits of secured business loans is that most loans come with considerably low rates. This is because the lenders hold a security in place, which they can use to recover losses in case of any repayment default. On the contrary, unsecured business loans usually come with higher rate of interest. Here the rate of interest is based upon the loan amount, existing debt obligations, business credit history and various other factors. Higher the lender’s risk, higher would be the rate of interest for an unsecured loan. Thus, when it comes to availing lower rates, secured business loans have an edge over unsecured loans.
- Loan amount
Businesses in need of a higher loan amount can consider applying for secured loans if they hold a high value asset against which they can pledge. This is because most of the unsecured loans provide comparatively lower loan amounts in India. Loan against property is also a good option for businesses if they want to avail higher loan amounts at a lower rate.
- Loan amount disbursal
The speed for loan disbursal differs based upon the lender. However, generally secured business loans take longer time to be processed owing to validation the lenders require doing before approving the loan. Unsecured loans, however, have faster disbursal rate owing to their minimal document requirement.
- Repayment tenure
Secured loan is a better option for businesses in need of a longer repayment tenure. Tenure for secured loan can go up to 15 years while for unsecured loan, it is usually up to 5 years with just few lenders willing to offer a higher tenure of up to 7 years.
Both unsecured and secured business loans come with their own set of pros and cons. Businesses can opt for either of them based upon their needs and preference. However, it is crucial to practice due diligence before availing business loans of any form as failure to meet the repayment by due date has several consequences attached.
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