Wondering how you can finance your small business? Looking for safer business loans? Choose secured working capital loans to finance your ventures. Secured capital refers to loans that are backed by collateral or some other asset. Collaterals can include mortgages, cars, investments, bonds, and other types of debt securities. They are a popular type of loan for businesses that cannot afford to take huge risks like small to mid-range enterprises. A secured loan enables them to run their business costs at lower interest and EMI options.
Who should apply for secured loans?
Secured working capital is one of the best options for SMEs who have a lower risk appetite. It is ideal for those businesses that need money to run their operations, expand their inventory, or hire more human capital, but lack the funds to do so. Due to added collateral, working capital loans are more secure. In case of any tragedy, you can default on the loan and use your collateral to pay off the amount. Since working capital loans are secured loans, lenders are also more likely to offer better loan terms.
Key Considerations before applying for secured working capital
Here are a few things that you must note before applying for secured working capital.
- Insurance: If you can add insurance to your collateral, make sure to do it. For example, if you keep your inventory or farm or car as collateral to avail of the loan amount, in case of some tragedy, you risk losing your money as well as your collateral. It is best to secure your collaterals and then use them to sanction your working capital.
- Ownership documents: Make sure that your documents are in order before applying for secured working capital loans. If you are offering your house as collateral, make sure that its property documents, registration certificates, and tax details are correct. If you are offering your car as collateral, make sure that it has insurance.
- Period of maturity: If you want to take working capital with bonds as collateral, make sure that you repay the loan before your investment matures. For example, if you own a bond with a 12-year maturity period, while your loan repayment tenure is of 15 years, once the bond matures and you get the amount, you need to submit a new collateral or pre-pay the loan amount. Time is of the essence and an important factor in securing working capital loans. Your collateral should have market value and must not run out before you pay off the loan.
Advantages of availing of secured loans
Secured working capital loans are one of the best options for SMEs who value stability and prioritize safety. Here are some of the advantages of availing of secured working capital.
- Low-interest rates: One of the best benefits of SME working capital loans is that they offer the lowest interest rates. They are backed by collaterals or security deposits, which would protect lenders from losses, in case you are unable to repay the loan amount.
- Higher loan amount: If you opt for secured working capital loans, you can avail of a larger loan amount. Lenders have no qualms about disbursing a higher amount if the borrower can provide valuable collateral because the loan-to-value ratio is almost 65% of the market value. Lenders may offer as high as INR 10 crores for business assistance.
- Longer loan tenure: You may also secure a longer repayment tenure if you apply for working capital loans. Banks offer up to 10 years or more to repay working capital loans. Since these loans are backed by collaterals, you can also negotiate with the lender for better loan terms.
- Flexible loan terms: If you do not have the best credit scores, you can still apply for working capital loans backed by collaterals. Lenders are more likely to be lenient in sanctioning secured working capital loans than unsecured loans. If you have a business partner with better credit scores, you can list your co-owner as a guarantor as well to secure better loan terms.
- Lower EMI: Another benefit of applying for secured working capital loans is that since they have the lowest interest rates, they also have lower EMI settlements. You can comfortably repay the monthly EMIs as well as ensure that your business operates smoothly.
Disadvantages of availing of secured loans
Secured loans may not always be the best option. Here are a few disadvantages that you must take note of before applying for secured capital.
- Inflation risk: A potential downside of availing of secured working capital is the inflation cost. With rising prices, your collateral’s market value would also reduce over time. If the value drop is too extensive and you have a long business loan tenure, lenders may ask you to provide another collateral or pay extra money.
- Limited liquidity: Some types of secured working capital like certain kinds of bonds cannot be liquified instantly. If you need cash urgently to meet day-to-day operation costs, you have to dip into your personal savings or secure funds from elsewhere.
- Default risk: Although considered to be a less risky business loan, there is still a risk of default. If you fail to fulfill the monthly obligations on time, lenders may seize your collateral.
Despite the shortcomings, one cannot deny that secured working capital loans are the lifeblood of SMEs. They are easy to sanction, offer some of the lowest interest rates, and have flexible loan repayment options.
The question arises whether you should opt for secured capital loans. If you are a small business and need safer alternatives to bet on, secured working capital loans are your key to expanding your horizons. Secured working capital loans are one of the easiest loans to sanction, for their collateral acts as a security layer, enabling lenders to trust the borrowers more. Head over to ApnaPaisa for quick loan disbursals with minimal paperwork. You can also consult some of their experienced financial planners to help you budget and streamline your business expenses effectively.