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Whether you want to give a facelift to your business, launch a new outlet, buy new equipment or increase working capital, when the need to borrow money comes up, there are always choices. There are two types of business loans a business owner like you can get – secured and unsecured business loan.
But which one do you choose? Is one option better than the other under special circumstances? Each type of loan for business has its own requirements. Each business loan has its own advantages and disadvantages. Read to know more.
Start with your business loan eligibility. When you apply for a loan, it’s important to know the difference between secured and unsecured business loans. As a smart borrower, you should be able to know which loan fits your needs best. Here are explanations of both these loan products. We expect that you will take the right decision.
Unsecured Business Loans
Unsecured business loans are given without any kind of collateral from the borrower. Top financial institutions like Tata Capital give these loans by determining the business borrower’s creditworthiness.
For the lender, an unsecured loan for business has more risks. For the borrower, this loan means no need to give any collateral like home, property, machines, land, jewellery etc. It is a myth that unsecured loans are harder to obtain than secured loans. Today, such loans can be easily received if the documents are okay. At Tata Capital, one can get an unsecured business loan starting from Rs 5 lakh and up to Rs 50 lakh. The loan tenure ranges from 12 months to 36 months, which is a good time for a healthy business to return the full amount.
Interest rates on unsecured business loans can be a little higher than secured loans. This is because the risks of such unsecured loans are higher due to the unavailability of any collateral whatsoever. But, such loans are not priced out of reach. For instance, a Tata Capital business loan starts at 19% per annum. Let’s take an example. Business owners can get Rs 10 lakh 100% collateral-free business loan by paying Rs 36600 per month EMI for a 3-year tenure at 19% interest rate.
Do note that the term of an unsecured business loan is usually shorter than the term of a secured business loan. This is not bad, because a longer loan tenure means more interest payment. Taking the above example of Rs 10 lakh loan for 3 years at 19%, the total interest payment is Rs 3.19 lakh. But taking the same Rs 10 lakh loan for a secured business loan at 16% for 6 years will lead to Rs 5.62 lakh interest payment. Despite a 3% lower interest rate, the 3 years extra tenure actually makes you as a business owner pay a lot more as interest.
An unsecured business loan works best for established business borrowers.
Secured Business Loans
You may have already guessed that secured business loans are different from unsecured business loans because you need to offer some type of collateral to the lender. This ‘security’ makes it safer for the lender to give out this business loan in case the borrower defaults on payments for the loan. But, not everybody, who has a thriving business, does have assets to pledge. There can be other issues due to which a business owner like you would not like to provide collateral like home, car, investments, or other assets.
Because the loan for business is ‘secured’, the interest rate is usually lower on a secured business loan. Typically, banks are very interested in giving secured business loans due to their small appetite for risk. It is also true that the moment the borrowed amount crosses Rs 5-10 lakh, banks insist on some sort of security.
Do remember that your business loan eligibility may not allow the bank to give you a loan. It is this point that the question of providing security will come. If you do not have enough time, the approach should reduce any wastage of time, especially if your goal to quickly get funds and use them.
However, if you decide to apply for a secured business loan, make sure the assets that you want to put up as collateral are worth losing. Yes, there is always a chance that you may default. In business, ups and downs happen. In such a situation, the ownership rights of whatever you put up as collateral can go to the lender from whom you took a loan for business.
Conversely, an attachment may be imposed on the asset, thus preventing you from realizing any economic value from that collateral. Also, make sure that you get an accurate value estimate of your collateral before you go ahead with the business loan application.