Key Differences between Secured and Unsecured Business Loans

Loans are often needed to meet the expenses of businesses. If you want to borrow money for your business, you must decide whether you want an unsecured or secured loan. It offers lower interest rates, fewer eligibility requirements, and a higher borrowing limit.

When you fail to pay your loan, the lender may be able to seize any of the property that you own. Unlike secured business loans, unsecured business loans do not require you to provide any collateral to obtain them.

Read on to explore the secured unsecured loan difference.

What is a secured business loan?

Secured business loans allow you to borrow a specific amount of money. Additionally, you will need to provide security for the loan amount, usually in the form of an asset to the lender. Small and medium-sized businesses have access to secured business loans from most lenders in India. They can secure their investment and encourage the borrower to repay their loan timely.

Examples of secured lending :

• Usually, businesses seeking to raise funds for the purchase of a competitor would secure loans against commercial property and machinery.
• To secure a loan for their business, the director mortgages their residential property (i.e., their private residence).
• Since invoice finance is tied to invoice value (i.e., your business’ money owed), it is technically a secured loan.

Advantages of secured borrowing :

• Lenders usually take on less risk with secured business loans
• Securing loans allows you to borrow more significant amounts
• The terms of repayment can be favorable because they are spread out over time
• Businesses with low credit scores can grow with business assets as security

Disadvantages of secured borrowing :

• Due to the lender’s due diligence procedures, it often takes longer to obtain a secured loan
• Defaulting on a loan can put your company’s valuable assets at risk
• Costs may need to be paid upfront

What is an unsecured business loan?

Unsecured business loans allow you to borrow a specific amount of money without pledging any assets as collateral. Unsecured business loans typically offer lower loan amounts since lenders have fewer options for covering losses if a borrower defaults.

Examples of unsecured finance :

• Finance for working capital, a seasonal business can cover a lean period through a two-month loan at a monthly interest rate.
• A short-term loan for cash flow with a term of fewer than two years.
• As with invoice finance, merchant cash advances are based on future card terminal sales forecasts rather than existing debts.

Advantages of unsecured business loans :

• The process of obtaining them is quicker than that of obtaining secured business loans
• Businesses do not need to risk losing valuable assets
• Repayment terms are flexible when it comes to unsecured business loans

Disadvantages of unsecured business loans :

• Large amounts of unsecured business loans are not available
• unsecured business loans have a higher cost than secured business loans
• Lenders may require a personal guarantee when they have no security

To learn more about unsecured business loans and learn the different types, read our informative guide: Why are unsecured business loans better for small businesses?

A] Secured vs Unsecured Business Loans – What’s the Difference?

When deciding on a loan, it’s important to know whether it’s secured or unsecured. As a result of a secured business loan, the lender can provide you with financial assistance based on the collateral you own against the loan (such as your accounts receivables, a house, or equipment). Unsecured business loans do not require collateral, which means you do not have to provide an asset to secure the loan.

A business loan may be a short-term or a long-term one depending on your circumstances and business goals, and which one is a better fit for your business depends on those factors. The following are the main secured loan and unsecured loan difference:

1. Providing collateral/guarantees

Collateral is required to obtain a secured loan. A secured loan is the best choice if you want a more significant loan amount and you own assets such as land, a house, or other items that could be pledged as collateral. A lower interest rate will also allow you to borrow more money.

Alternatively, unsecured and instant loans can help you get funding immediately if you do not have collateral.

2.Needed Loan Amount

Online lenders offer instant loans that can be applied for whenever you need a small loan. There are no restrictions on how you can use the funds, and you can obtain them from the convenience of your home.

There are, however, some situations where you can apply for a secured business loan if you need a larger loan or are not eligible for an instant loan.

3.The Processing Time

Unsecured business loans require no collateral and can be processed quickly, sometimes within hours. Unsecured personal loans are the best option when you need quick funding or an emergency loan.

A secured loan requires more documentation and takes longer to approve and process. A secured loan can help you fund a planned expense.

4.The Interest Rates

A secured loan is usually lower in interest rate because it carries less risk for the lender. The interest rate on a secured loan may be lower than that of an unsecured loan because collateral is not needed. Choose the type of loan depending on your ability to pay the interest.

5.Credit Score

Credit checks are usually conducted regardless of the lender’s requirements; secured business loans are less stringent. Since an unsecured loan depends on credit reports, it has stricter requirements.

Also Read : 6+ Different Types of Unsecured Business Loans

Conclusion

As we have seen, there’s a clear divide between unsecured and secured loan, even the advantages and disadvantages of taking out an unsecured and secured loan differ. Real Money Solutions can help you find the right fit for your business.

There is no right or wrong decision when choosing between these two options, and you can always make a choice based on the situation that suits you best. Therefore, it is highly recommended that you conduct due diligence before deciding on a source of credit, as finding the right source can significantly boost your business’ growth.

You can apply for a secured and unsecured business loan in Mumbai.