Whenever a business owner thinks of availing a loan for business, he is confused between a secured loan and an unsecured business loan. Knowing the difference between the two would help in making an informed decision. In this blog, we shall discuss why a business loan without security is better than a loan with security.
When an individual thinks of starting a business, he requires capital and resources. Well, the best way to raise capital is through savings. Or money can be borrowed from family members or friends as well. However, a business requires money from time to time. It requires money for expansion, inventory purchase, cash-flow, or various other reasons. It is the situation where a business owner thinks of availing a business loan.
Now the question is, which type of business loan to avail? Typically, there are two types of business loans – secured loans and unsecured loans. Both types of loans have different characteristics and requirements. The two are extremely different, and therefore, it becomes extremely crucial to choose the best one.
|Secured Business Loan||Unsecured Business Loan|
|· Collateral requirement||· No need for collateral|
|· Seizure of collateral on the default||· No seizure of personal assets on loan default|
|· Generally, offered by traditional lenders||· Offered by NBFCs and Online Lending Companies|
|· Takes more a month in processing||· Is processed within a few working days|
Let’s now understand why unsecured business loans are better than secured loans.
For secured loans, collateral is required to back the business loan amount. The collateral is a physical asset that can be liquidated in case the borrower is not able to repay the loan amount. Whereas, in business loan without security, no collateral is hypothecated. Hence, business owners who cannot provide collateral can have access to formal credit for their business.
The risk in secured loans is high because if the borrower is unable to repay the loan, he will end losing the security. However, there is no such risk in collateral-free business loans.
The secured loans take time in processing. The lender first assesses the value of the security hypothecated to determine the loan amount that the borrower is eligible for. But there is no such need while processing unsecured loans. The loan amount is assessed based on the creditworthiness of the borrower.
The major difference between a secured and unsecured loan is that the former is offered by banks while the latter is offered by NBFCs. When applying for a small business loan with a bank, the applicant needs to visit the bank and submit documents. However, most NBFCs offer online application process where there is no need for the borrower to visit lender’s office.
The afore-mentioned points very well differentiate the secured and unsecured loans. However, when you avail a business loan, you need to consider a few things, including loan eligibility, documentation requirement, and repayment tenure to make a sound decision.