Which is Better Secured or Unsecured Business Loan?
Initiating a business always comes with a funding necessity and it can be taken care of by opting for a business loan. Yet, there’s a dilemma that remains unresolved. Prospects opting for financing tend to ask a rudimentary question, which is:
Which loan should he/she borrow? Should the candidate apply for a secured loan or an unsecured business loan?
Both financing options are viable for businesses in their nascent stages. Also, the ultimate choice between a secured and unsecured business loan depends on the business’ specific needs.
What is a secured business loan?
A secured business loan means that the credit availed by a business has an asset pledged against it as security. Usually, such a loan is availed for a significant amount of finance. Since a secured loan requires an asset to be kept as security, hence it is best if a business satisfies the following conditions:
- The business has a considerable asset value to be pledged.
- It is in a position to make repayments over a prolonged time.
Is there a financing alternative for businesses requiring a smaller amount?
Yes, there is.
Businesses, particularly small, and medium scale ones, require moderate amounts of finance to start while overcoming challenges specific to them. An unsecured business loan can easily finance such costs.
Such loans require no security, unlike secured business loans. Apart from that, such loans are ideal for businesses needing a quick infusion of cash. Further, borrowers can repay unsecured business loans within one to five years.
Whom do businesses approach for an unsecured business loan?
NBFCs on the lines of Bajaj Finserv provide small and medium scale industries with such loans at competitive unsecured loan interest rates. Moreover, such institutions require minimal documentation for processing. This reduces the turnaround time for disbursal of the loan.
What do financers require for providing an unsecured business lending to small and medium scale enterprises?
Primarily financiers require:
- A good credit history of the borrowers, substantiated by a high CIBIL Score.
- Business plans that quantify reliable growth projections.
How does an unsecured business loan help a small business?
Unsecured business loans help a small business by:
- Supporting working capital management.
- Mitigating immediate financial contingencies.
- Flexibility in end use, since such a loan can finance anything beginning from day-to-day business requirements to asset purchase and management.
So, what should a business settle for between a secured and an unsecured business loan?
The choice of a business between these two financing alternatives depends on:
Purpose of the loan
Borrowers must have an idea of what they need the loan for. For financing heavy equipment and machinery, businesses could opt for a secured business loan, owing to their longer repayment tenure. Longer repayment tenure helps business spread out their repayments on an equitable basis.
Amount of funds required
Businesses must also have a near-accurate estimate of the amount of funds that they might need. Applying for a lower amount lower than their proposed requirement would lead to companies borrowing repeatedly. While asking for a higher amount might result in them running for risk of defaulting repayments.
In both cases, lenders become wary of the borrowers’ creditworthiness. Further, both circumstances adversely affect the borrowers’ CIBIL scores, making them unworthy for availing any further credit.
In short, businesses must be aware of their financial abilities before making a choice. There can be no clear judgment in favour of either a secured or an unsecured business loan. Thus, it is only the businesses that can run the required internal checks and make a decision that suits them best.
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Category: Business Debt
