Entrepreneurs can start or expand their businesses only with adequate funds. To arrange funds, you need business loan at affordable interest rates. Business loans are of two types: Secured Loans and Unsecured Loans. Both are different and have their own pros and cons. If you understand the difference between the two, you are quite financially literate. A secured business loan is when borrowers offer collateral security whereas an unsecured loan is without security. Choosing the right type of loan is an important financial decision. It has a direct impact on your financial health.
What is a Secured Business Loan?
A secured business loan is backed by an asset, equipment, or other business assets. These assets can be machinery, stock, commercial property, and vehicles. Secured loans are also given on Merchant Cash Advances and Accounts Receivables. On the other hand, unsecured business loans are sanctioned to borrowers based on their creditworthiness and reputation.
Secured business loans can be availed in two ways –
- If a business owner pledges his private property for lending.
- If a business owner raises money against the plant and machinery of his commercial premises.
Features of Secured Business loans
- Lower interest rates– Businessmen can take advantage of low secured business loan rates and save on interest. A business with good earnings can easily pay off the loan within the term. However, if the business defaults on payments, the bank would seize the property to cover the loss.
- Value against the property– The amount of the loan depends upon the value of the property. The property value needs to match the amount of loan required by the borrower. Assets such as homes, commercial property, cars, stocks, bonds, or equipment can be pledged for a business loan.
- Check your affordability– Before applying for a business loan, you need to be sure about your financial health. You should only take a loan amount that you can comfortably repay. It is advised to check an online business loan calculator to identify your monthly EMI based on the principal and interest rate.
- Low risk for lenders– Secured business loans are easily available to borrowers as there is a minimum risk for the lenders. If you have a low credit score but can offer collateral security, then secured loans are ideal for you. Business owners with low creditworthiness opt for secured loans for quick access to funds.
What is an Unsecured Business Loan?
An unsecured business loan involves no collateral security. Lenders face a higher risk in providing unsecured loans to borrowers. Before providing unsecured loans to the borrowers, they check the borrower’s credit score and other credit details. They meticulously analyze and evaluate the company’s history, nature of business, credit history, balance sheet and income statements, cash flow, and cash reserves. If the borrower has a good track record of 2 or more years with high earnings and adequate cash flow, an unsecured business loan is an apt choice for you.
Features of Unsecured Business loans
- High-interest rates– As lenders face high risk in providing unsecured loans, you are expected to pay high business loan rates. Due to high-interest rates, unsecured loans are quite expensive. Only businesses with high cash flow should opt for unsecured loans.
- Save your assets– Unsecured loans do not require your equity. You can save your assets by opting for an unsecured loan offered by banks and financial institutions.
- Simplified process– As there is no collateral attached, the process of disbursing a business loan is quite a simplified process. The lenders check the creditworthiness of a borrower and sanction the business loan.
Secured loans vs. Unsecured Loans
For a borrower, it is difficult to assess which option is better. After understanding the features, you can arrive at a decision to maintain good financial health and expansion of your business. By opting for a secured loan, you can lower your burden with low monthly installments. A simple business loan calculator gives you an estimate of your monthly repayments depending on your loan amount, tenure, and interest. If your business is growing quarter by quarter, choosing a secured loan is a better option.
Secured loans are offered to borrowers based on the value of the property or asset. It means you cannot borrow more than your worth. In case of an unsecured loan, you may borrow the amount more than you need. You may unnecessarily increase your burden with high-interest rates. Before choosing, you must calculate your financial capabilities and pick the right kind of loan that suits your business.