Secured Business Loan – Types, Eligibility, Documents, Benefits
There are situations wherein one is in possession of assets that they do not wish to sell, yet are in need of funds to either expand their business or buy new equipment. It is a perplexing situation when you have the means to raise capital, but do not wish to alter the ownership of your assets.
These are exactly the pain points Secured Business Loans address. With this type of financing, you could unlock the latent value of your assets, which at times may be idle or not in use but hold the potential to give you gains in the long term, thus preventing you from selling them. Let us then understand what Secured Business Loans mean, its types, how such loans work and whether it is suitable for your business.
What is a Secured Business Loan?
A secured business loan is a financing option available to businesses by pledging an asset as collateral. An entity could take a business loan by providing an asset as collateral, which makes the lending less risky from the point of view of the lender. In case the borrower defaults on the payment, the lender could seize and dispose of the asset under SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act, 2002.
Since the loan amount is secured by an asset, interest rates are comparatively lower for secured business loans. From the borrower’s point of view, secured business loans proffer an option to avail of business loans at low-interest rates while continuing to own the asset.
The security of the collateral also allows lenders to sanction higher amounts for a secured business loan as compared to unsecured loans. Because of the aforementioned, these loans are suitable for business expansion or debt consolidation.
Types of Secured Loans
Secured Loans can be classified based upon whether they are secured by a personal guarantee or collateral-
1. Secured by Personal Guarantee– In such secured loans, the promoter or the partner of an enterprise pledges their assets as collateral.
2. Secured by Collateral– In such secured loans, assets like property, machinery, outstanding invoices, etc. are pledged as collateral.
What assets are accepted as collateral for a Secured Business Loan?
The following assets may be accepted as collateral for a business loan-
- Property– Commercial, Industrial, or Residential property may be accepted as collateral by a lender. The loan amount one can get against them however differs. One may get a higher loan amount against a residential property than an industrial or commercial one.
- Machinery– Equipment or Machinery may be accepted by a lender as collateral for a business loan. In certain cases wherein a loan is taken to buy machinery on invest in equipment, the equipment to be bought itself serves as the collateral.
- Accounts Receivable– Accounts Receivable, like outstanding invoices may be accepted by a lender as collateral by a Bank/NBFC.
- Shares– Shares of a company may be accepted by a lender as collateral. However, one may get a lower amount of loan sanctioned against shares since the market value of shares is highly volatile and susceptible to shocks.
Also Read: Best business idea for women entrepreneurs
How do you get a Secured Business Loan?
The process to get a secured business loan is similar to that of an unsecured loan, except with some added steps relating to the pledging of an asset and checking its authenticity-
- First, a company in need of financing approaches a Bank or NBFC.
- The Bank or NBFC may ask for the company’s financial as well as registration details to determine the credit score and the authenticity of the company along with its compliance records. The Financial Institution may also ask for the documents related to the asset to determine its market value and authenticity. The Bank/NBFC may also conduct an in-person verification or a site visit in case the asset pledged is property or a vehicle.
- The Banks/NBFCs usually also check the credit score of the directors of the company while checking the eligibility for a business loan.
- If the Bank/NBFC deems the company creditworthy and the asset class to be legitimate and belonging to the entity seeking the loan, they may agree to sanction a loan to the company contingent upon the stipulation of pledging an asset.
- With OneNDF, you can amalgamate these steps, with the platform preparing a Financial Health Card for you and connecting you with only lenders you’re eligible to get a loan from. Apply for Secured Business Loan.
- Once the documents are signed, the Bank/NBFC would disburse the loan with the terms and conditions pertaining to repayment. The ownership of the asset does not change with the loan disbursal and the entity would continue to be in possession of the asset unless there’s a default on their part.
- In case the entity desires to sell the asset pledged in the future, they may need to seek the permission of the lender till there’s an outstanding loan amount.
Features of a Secured Business Loan.
There are various specificities of a secured business loan that design its use-cases and makes it distinguishable from other type of financing instruments available in the market-
- A secured business loan has lower interest rates when compared with unsecured business loans. This is because the lender has the legal power to seize the asset in case of a default, thus making the loan less risky.
- The security of an asset also allows a lender to sanction a higher amount for a loan. Depending upon the type of asset you pledge, you may get a loan amount of 50-90% of your asset’s market value. For example, you may get a loan of around 75% market value of a residential property but 60-65% in the case of a commercial property.
- The possibility to avail of a larger amount for a loan makes a secured business loan suitable for debt consolidation. Often, small unsecured loans have a higher interest rate that makes them marginally costlier than secured loans. The small loans could be consolidated into a single debt to reduce the cost of interest payments.
- Secured loans often have a quick approval time once the documentation is complete.
Eligibility Criteria for a Secured Business Loan
The following criteria may be used by lenders to approve a Secured Business Loan-
- Business Vintage– Lenders may prefer lending to businesses that have been in existence for more than 3 years.
- Credit Score– A good credit score (usually above 750) is preferred.
- Age of Promoters– The promoters must be at least 21 years old but not older than 70 years.
- Turnover– The lenders may prefer giving loans to businesses with at least INR 40-50 lakhs of turnover.
Also Read: Business Loan eligibility criteria in India
Documents required for a Secured Business Loan
The following documents may be needed to get a Secured Business Loan-
- PAN Card, of both the Company and its Directors.
- GST details (Registration Certificate and Returns of the past 12 months).
- KYC- Aadhaar Card/Voter ID.
- Trade License, if required.
- Address Proof- Utility bills, Aadhaar Card, etc.
- Income Proof- Bank Statement of past one year, Income Tax Returns (ITR) of past 3 years, and audited financial statements.
- Establishment Proof- Udyam Registration Certificate.
- Partnership deed (if applicable).
- Documents of the asset pledged and proof of ownership.
Also Read: Understanding Business Loans: A Comprehensive Guide
How are Secured Business Loans different from Unsecured Business loans?
| Secured Business Loan | Unsecured Business Loan |
| Requires collateral. | Does not require collateral. |
| Higher borrowing limit. | Lower borrowing limit. |
| Lower interest rates. | Higher interest rates. |
| The process may include physical verification of the asset pledged. | The process can be fully digital. |
Check For Other Loan Options-
Should you go for a Secured Business Loan?
Secured Business Loans have an added advantage over other types of business loans that they have less interest rates and a longer tenure for repayment. All that is made possible by the security of the asset being pledged by the borrower.
Since merely pledging an asset does not change its ownership structure, you could go pledge an asset as collateral to get a loan and still derive passive income from it.
Thus, if you have an idle asset that can be used as collateral, you could opt for a secured business loan not solely to get debt at a better cost but also to consolidate your outstanding debt if any.
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FAQs
1. What is the rate of interest on a secured business loan?
The rate of interest on secured business loans ranges from 8.9% to 12%. The interest rate is contingent upon the loan requirement as well as the nature of the asset pledged.
2. What is the limit of a secured business loan?
There is as such no limit on a secured business loan. The maximum amount you can borrow against your asset depends upon the type of asset you have. For example, you may be able to borrow more against a property as compared to the shares of the same market value because of the high volatility in shares.
One may get a loan of around 75% of the market value of a residential property, and 65% loan amount of the market value of a commercial property.
3. What is the CIBIL score required for a secured business loan?
Usually, a CIBIL score above 700 makes one eligible for a secured business loan.
4. What are examples of secured loans in business?
A Loan against Property (LAP) is an example of a secured business loan, among others.
5. What is the difference between a business loan and a secured business loan?
A business loan is any loan taken for business purposes. It may be secured or unsecured (collateral-free). A secured business loan on the other hand is a type of business loan that is secured with collateral.
6. What are the benefits of secured business loans?
The main benefits of secured business loans from the point of view of the borrower are-
- Lower interest rates
- Long repayment tenure
- Higher borrowing limit
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