The conundrum of choosing between a secured or unsecured business loan knocks at unsuspecting minds whenever there’s a financial need. The difference between the two ranges from the interest rates they offered to the process of getting the loan sanctioned.
Thus, to determine which one you should go for, we must first understand secured vs unsecured loan and their pros and cons.
Secured Business Loans are simply collateralised loans taken for business purposes. That means, an asset must be pledged to avail of these loans. The collateralization of an asset decreases the risk for a lender as they could seize the asset in case of default.
Secured business loans are given against various types of assets some of which include-
Since these loans are secured with an asset, the interest rate offered on secured business loans is lower than that of an unsecured business loan.
Unsecured Business Loans are loans taken for business purposes that do not require any collateral. That means, an asset may not be pledged to get such loans. Thus, the eligibility criteria to get an unsecured business loan includes a good credit score that assures the lender that the borrower would repay the loan and not default. The risk to the lender in an unsecured business loan is mitigated by levying a higher interest rate
An unsecured business loan could be of various types, that includes-
Also Read: Business Loan eligibility criteria in India
| Secured Business Loan | Unsecured Business Loan |
| Requires collateral. | Does not require collateral. |
| Lower interest rate. | Higher interest rate. |
| Eligibility criteria are lenient. | Eligibility criteria are strict. |
| May not require a personal guarantee. | May require a personal guarantee. |
| It may take long to get the loan sanctioned. | The process is short and a loan could be sanctioned quickly. |
| More documentation is required because of the collateral. | Minimal documentation is required. |
| Higher borrowing limit. | Lower borrowing limit. |
| Longer tenure. | Shorter tenure. |
| There is a risk of losing an asset in case of default. | The lender would have to initiate legal proceedings to recover the amount. |
| It may entail a physical verification of the asset/property. | The process could be fully digital/online with no physical verification. |
With each loan type having different use-cases, whether one should go for an unsecured business loan or a secured business loan, one depends upon the requirement of the business concerned.
A business may not be able to get a secured business loan if they do not possess many assets that are accepted by the lenders as collateral. The value of the loan amount also depends upon the nature of the asset and its market value. Thus, the contours of a business loan are heavily contingent upon the asset when secured.
In case the borrower does not possess an asset that could get them a business loan on good terms, yet have good financials, they could opt for an unsecured loan. An unsecured business loan also has a quick turnaround time and is sanctioned quickly.
A secured business loan is not suitable in scenarios wherein a business may need to borrow time and again to take care of short-term requirements. The documentation requirements make the process a tedious one. In such scenarios, an unsecured business loan could be opted for due to its easy accessibility.
Must Read: Overcoming Cash Flow Challenges Through Short-Term Financing
Secured loans on the other hand offer a lower interest rate and a longer period of repayment. This makes secured business loans suitable for purposes such as business expansion, new investments in machinery, or debt consolidation.
If a business has a consistent income, regular installments over a longer tenure would allow it to harness the cost-effectiveness secured business loans offer.
Check For Other Loan Options-
Banks usually give an unsecured business loan after heavy scrutiny of the financials of a company. If the lender thinks that the loan would be repaid by the borrower, based upon the credit history, it would be willing to sanction a loan to them. Thus, a good credit score is a requirement for an unsecured business loan. To mitigate the risk of default, a higher rate of interest is also levied by the lender. Thus, it also helps in increasing the profit margin of the lender.
The tenure for an unsecured business loan usually ranges from 12 to 36 months. However, the lender in certain cases may decide to restructure the tenure upto 48 months.
Unsecured loans are risky from the point of view of the lender. Since the loans are not secured by an asset, they are susceptible to the risk of default. At times, the lender may ask for a personal guarantee for sanctioning an unsecured business loan to reduce their risk exposure.
Secured business loans are loans that require an asset to be pledged as collateral to mitigate the risk of the lender, while unsecured business loans are collateral-free.
Secured Loans are better both from the point of view of the lender as well as the borrower. For a lender, the risk involved in lending is less due to an asset being pledged as collateral. For a borrower, secured loans offer lower interest rates, a longer repayment tenure, and do not alter the ownership of the asset.
