A business loan can be a powerful tool for financing your business’ operations, product development, expansion and more; and in today’s fast-changing economy, both secured and unsecured options can come in handy. However, understanding what sets them apart can help you choose the best option to meet your business’ financial requirements.
Secured Business Loan
Secured business loans are backed by collateral, which means that the borrower must pledge an asset to the lender as security against the loan amount. The collateral required can be assets like residential/commercial/industrial properties, gold, fixed deposits, inventories, invoices, machinery/equipment, securities, etc., depending on the loan type.
The presence of collateral mitigates credit risk of lenders. In case a borrower defaults, the lender has the right to seize and liquidate the pledged asset to recover the outstanding loan amount. Due to the reduced credit risk, lenders offer secured loans usually at lower interest rates, higher loan amounts and longer repayment tenures.
Features & Benefits:
Following are the key features and benefits of secured business loans:
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Lower interest rates due to reduced credit risk of lenders
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Higher loan amounts, depending on the value of the pledged asset as collateral
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Flexible and longer repayment tenure, depending on the type of loan facility
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Easier approval for those having difficulty in securing unsecured business loans, provided they have assets of adequate value to pledge
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Unsecured Business Loans
Contrary to secured business loans, unsecured business loans do not require collateral. Due to the absence of collateral, these loans pose a higher credit risk to lenders leading to higher interest rates and stricter eligibility criteria.
Features & Benefits:
Following are the key features and benefits of unsecured business loans:
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No collateral required.
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Faster processing and approval as no collateral is involved.
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No risk of losing assets in case of default.
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Comparing Secured and Unsecured Business Loans
| Particulars | Secured Business Loan | Unsecured Business Loan |
| Collateral | Requires collateral in the form of property, deposits, investments, inventories, gold, invoices, equipment, etc. | Does not require collateral |
| Loan Amount | May offer higher loan amounts based on collateral value | Offered loan amount is usually smaller |
| Interest Rates | Lower rates as presence of collateral reduces credit risk for lenders | Higher rates as unsecured nature increases credit risk for lenders |
| Risk Factor | Risk of losing asset ownership in case of loan default | No risk to personal assets, but missed payments will reduce credit score/rating |
| Best For | Those ineligible for unsecured business loans; also for those requiring loans at lower interest rates and longer loan tenures. | Those requiring financing of lower loan amounts without pledging their collateral |
Which Loan Should You Choose?
Which type of business loan is right for you would depend on multiple factors, including your loan amount requirements, ability to provide collateral, loan processing time, loan repayment capacity, repayment structure of the loan, etc. Secured business loans would be an ideal option for those ineligible for unsecured business loans. Secured loans are also ideal for those requiring loans at lower interest rates and/or for longer loan tenures. On the other hand, secured loan options are great for those requiring financing of lower loan amounts without pledging their collateral.
For the best business loan options, prospective borrowers can visit online financial marketplaces like Paisabazaar to check and compare offers from multiple banks and NBFCs.