When there is a need to borrow funds for business, the business owner founds himself caught between secured loans and unsecured business loans. These two types of loans that the business owner can avail has its own set of advantages and disadvantages. And when the business owner has to choose between the two, he must know both the types of loans in depth in order to be able to make a sound decision.
Secured Business Loan
The Secured loans, also called collateral business loans, are the ones where you have to offer collateral to the loan lender to get the loan approved. This collateral secures the loan amount for the lender in case the borrower defaults on the loan. The collateral can be an asset that has some monetary value, such as a home, car, bonds, or other assets. These loans are called secured loans as they are secured against collateral.
It is important to estimate the market value of the collateral hypothecated as the loan amount is directly proportional to it. Nonetheless, loan lenders usually offer loan amount lower than the value as they have to liquidate the collateral quickly. Notably, when the business owner applies for a secured loan, the collateral he puts up is something he is willing to lose.
These loans are generally offered by the traditional lender (such as banks) as they generally do not wish to take a risk with money. Also, since the collateral is required for secured loans, mostly big businesses and business owners are able to get these loans sanctioned. The small business owner often could not offer collateral.
Unsecured Business Loans
also read: which are the best business loans for smes?
Unsecured business loans are granted without any security hypothecation. The borrower is not required to offer any security and these loans are not secured in nature. Thus, also called unsecured business loans. The lenders approve or disapprove loans on the basis of the credit rating and behavior of the borrower.
As said earlier, the small business owners cannot usually avail secured loans. The unsecured loans are the best option for them. The unsecured loans for business are offered by NBFCs and online lenders. The loan ticket for unsecured small business loans is INR 1-5 lakhs. Also, the repayment tenure for loans ranges between 6 months and 24 months.
The terms and conditions of unsecured loans are not very strict. However, the credit score of the borrower must be more than 700. The other eligibility criteria are not very strict and NBFCs do not require piles of documents for unsecured loans.
Secured Loans VS Unsecured Loans
|Processing||The secured loans require a valuation of the collateral. Only after valuation, the loan amount is decided. So, the overall processing is long for secured loans.||The unsecured loans are processed solely on the credit rating of the borrower. The unsecured loans are processed faster.|
|Collateral||Collateral is required for these types of loans which makes it mostly inaccessible for small business owners.||There is no need for collateral hypothecation. So, these loans are ideal for small business owners.|
|Eligibility||The eligibility for secured loans is very strict and very few business owners are able to get these type of loans approved.||The lenders offer collateral-free loans are offered at very lenient eligibility criteria.|
|Documents||A long list of documents is required for secured loans.||A minimal list of documents is required for business loans without security.|