Whenever you think of starting a new business, venture, or try exploring new growth opportunities, you definitely need capital and resources. Most of the times, the best way to raise capital is to borrow from different sources. It could be either a family member or a friend or the most common way is to go for the formal sector i.e. a business loan from banks and NBFCs. If that seems to be the most feasible way, then the next question to arise will be, what type of business loan should you opt for?
Primarily, there are two types of business loans – secured business loans and unsecured business loans. Both of them have different characteristics and requirements. It depends on your own requirement as to which business loan will suit the best of your needs. Therefore, it becomes extremely crucial to know the difference between the two.
Secured Business Loans
The secured business loan is the one where an asset is required to be put up as collateral against the business loan provided. If the person defaults in the repayment of the business loan, the collateral is seized against the business loan amount taken. The collateral can be in any form, such as a car, home, gold, or any other asset having monetary value. The interest rate for a business loan with collateral depends from one lender to another.
Unsecured Business loans
The unsecured business loan is the one in which no type of collateral is required to hypothecate against the business loan taken. The business loan is given on the basis of the creditworthiness of the borrower. Also, the term of the business loan without collateral is usually shorter. Unsecured business loans are mostly suited for small business owners who cannot provide an asset as collateral (who do not have anything to offer as collateral).
The major point of differences between the two types of business loans are –
- Collateral: For secured business loans, collateral is required to be given against the business loan as a security. The business loan is backed against a physical asset. In the event of any default taking place, the asset is taken and sold to realise the unpaid business loan amount. Whereas, in the case of unsecured business loans, no asset is required to be put up as collateral, hence the name unsecured loan. The collateral-free loans are especially designed for small business owners who could not hypothecate any asset. Usually, collateral-free business loans are offered by NBFCs.
- The risk involved: The risk involved in taking a secured business loan is higher because if you are unable to pay the amount then the asset kept would be seized by the lender.
- Time period: While the secured business loans are availed generally for longer periods, the unsecured business loans can be availed for a flexible time period ranging from 12-24 months.
- Time for Application: Since unsecured business loans do not need any collateral valuation, therefore, it is easy to apply than the secured business loans which require greater administration.
- Application Process: The major difference between a secured and unsecured business loan also lies between its lenders. The secured business loans are usually offered by the bank while the unsecured business loan by the NBFCs. While availing a business loan from a bank, the borrower is required to visit the bank and submit documents in person. And in unsecured business loans, most NBFCs offer online business loan application process, so there is no need for the borrower to personally visit the lender’s office.
The afore-mentioned points differentiate the secured business loan and unsecured business loan in the best way. However, while availing a business loan, the borrower must keep in mind the other few things as well, which can subsequently affect their business loan availing and repaying ability. The following are the points to keep in mind:
- Eligibility: The most common business loan eligibility for the two types of business loan, of course, is the availability of the collateral. However, the lenders have set some other eligibility criteria as well—business vintage of at least 2 years, minimum turnover of INR 10 lakhs in the last 12 months, and the ITR of the last year should be more than INR 2.5 lakhs.
- Documents Required: The business loan documents required for unsecured business loans are very minimal as compared to the secured business loan.
Only a well-informed person can make a sound decision. And now that you know the difference between the two types of business loans, you can make your choice accordingly!
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