At first, it may seem tough to choose between a secured and unsecured business loan as both loans are “equally appealing” and come with their own set of benefits. But to finalize the right funding for your business, you must have knowledge of both.
Here are some factors which will help you decide the right funding option:
Easy to avail:
A secured loan can be easily obtained from a bank/ financial institution if the borrower is able to provide collateral or any other form of acceptable security against the amount being borrowed. Secured loans also involve a lot of paperwork as the loan amounts are of large denominations.
Unsecured business loans in India, on the other hand, are collateral free and don’t involve tedious paperwork. Also, since the loan amount is smaller, the disbursal takes place within a few days of loan approval. So SME’s looking for small sums of money to replenish their working capital requirements, a collateral free loan would be a better option.
Loan processing time and repayment schedule:
In unsecured finance solutions, the loan application and processing time are shorter meaning funds are available more quickly. They come with short repayment terms under which the borrower can make flexible payments. For example, a F inTech firm like Indifi offers easy repayment options under which borrowers can increase or decrease the EMI depending upon their financial conditions. Not only this, borrowers can choose to make bullet payments (i.e. lump sum payment of the entire loan amount) instead of periodic ones.
Secured loans, on the other hand, have a longer processing time due to many legal formalities. In addition, if the borrower fails to make payment within the repayment schedule they could lose the collateral they had pledged at the time of taking a loan.
While applying for an unsecured loan the lenders judge you on the basis of 5 C’s which are collateral, capital, capacity, character, and conditions. Only after careful evaluation, you will be provided a loan. Whereas secured loans only consider collateral as an eligibility criterion.
Loan amount: Through secured finance solutions, you will be able to get larger loan amounts. But they also involve heavy documentation. If your paperwork is not correct, the lender will not sanction your loan. Meanwhile, through unsecured finance solutions, borrowers can get a small sum for a shorter duration.
Interest rates: Since unsecured loans are not associated with any collateral. Therefore lenders charge higher rates of interest to mitigate the risk attached to them. Secured loans, on the other hand, have a lower rate of interest but higher fees. Also, collateral is considered as a security. So the real choice is between a lower rate of interest and reduced stress over losing an asset.
The requirement of Collateral: You only have to be worried about collateral in secured business loans. While applying for such a loan the lender will hold something as collateral until the borrower repays the full loan amount. Collateral can be in the form of a piece of land, gold jewelry, a home, a car, stocks, and bonds. A business can also pledge its machinery, inventory and raw materials as collateral to a lender. If the borrower fails to repay the loan within the loan duration, then the lender is entitled to sell the collateral to recover the outstanding loan amount.
Loan duration: Secured lending usually lasts from 5 to 20 years whereas unsecured lending varies between 1 to 7 years depending upon the amount of loan.
The differences between the two loans indicate that they are suited for businesses with different requirements. Secured finance is best suited for businesses willing to put collateral against their loan. Unsecured finance, on the other hand, is best suited for businesses who are not willing to put collateral against their loan.
If you are looking for a business loan, Indifi will work with you to understand your business requirements and recommend the right loan solution. Their easy repayment policy and fast processing features make them a trustworthy loan provider in the market.