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Secured vs. Unsecured Business Loans: What’s the Difference and Why Does It Matter?

Secured business loans are very popular nowadays in India. It is especially taken by individuals and business owners with low credit scores. Unsecured business loans are very popular when it comes to non-bank financial institutions or online borrowing platforms.

An unsecured new business loan is one in which the business owner does not have to pledge any collateral or security at the time of borrowing. Let us understand the detailed comparison.  

 

What is a secured business loan?

A secured business loan is one that involves security, property, asset, or any kind of collateral. Since there is security in borrowing, there is no risk of default. It ensures that even if the borrower is not able to pay back the loan, the financial institutions can recover the pending amount from the security or collateral.

Secured business loans are very common when you borrow from traditional banks. Start-ups and small businesses usually get secured business loans since they do not have much credit eligibility and background to prove.

Therefore, secured business loans are very popular among individuals. There are various perks and advantages to getting a secured business loan. However, it is applicable only to business owners that have a property or security to keep as collateral with the financial institution.

What is an unsecured business loan?

An unsecured business loan does not involve any collateral. There will not be any security or collateral with the bank to recover the defaulted amount if the individual is not able to repay. This makes the business loan a completely unsecured one. Unsecured business loans are good for individuals without any property to pledge with banks or financial institutions.

However, in order to get an unsecured business loan, it is very important to meet the credit eligibility and loan requirements. It involves a high measure of risk, so loan providers are very particular regarding the loan prerequisites.

The difference between secured and unsecured loans

Collateral: The most common difference between a secured and an unsecured loan is the presence of collateral. A secured business loan involves the pledge of collateral with a bank or non-banking financial institution.

On the other hand, in unsecured business loans, there will not be any collateral or security pledged by the financial institutions. This is one of the main differences between the two business loan options. Secured loans are good if you have a property to pledge.

Rate of interest: The rate of interest and affordability are always low when you take a secured business loan. Secured business loans have security and less risk, which makes the loan affordable. It is easy to get a low rate of interest when you secure your business loan with property or collateral.

On the other hand, the rate of interest for an unsecured business loan is always very high. This is because there is no security added to the business loan, which makes it risky. When the risk is high, financial institutions always impose a high rate of interest.

Availability: Unsecured loans are very popular with non-bank financial institutions and online fintech organizations. However, when it comes to secured loans, it is very popular with traditional old banks.

Approval: The approval rate of secured business loans is very fast and high. Since it involves security and collateral, loan providers find no risk. Therefore, the approval is done instantly, and the rate of approval is very high. On the other hand, unsecured business loans have no security, so there is a risk.

Therefore, it takes time for approval, and the rate of approval completely depends upon the eligibility criteria.

Eligibility requirements: The requirements for a secured business loan are minimal. Since secured business loans always involve collateral or security, the need for eligibility criteria is minimal.

However, unsecured business loans are approved on the basis of credit eligibility criteria. It gets approved only when the individual is able to meet the requirements in terms of income, credit score, financial background, and documentation.

Loan amount: In secured business loans, the loan amount is always high. For an unsecured business loan, the loan sanction amount is low because of the risk involved. In a secured business loan, since the loan provider has collateral, there is no difficulty in offering a high loan amount to business owners. 

Which one is better for you?

Both secured and unsecured business loans are very popular nowadays in India for small and medium-scale businesses. However, since the functioning and features of both are very different, it is important to understand what suits you better. A secured loan is good for individuals with a property to pledge and low credit eligibility.

Unsecured business loans, on the other hand, are a good option for people who have a good credit score but no property or asset to pledge to a bank or financial institution.

Secured business loans are very easy to find and come with instant approval. The eligibility criteria are always going to be high since an unsecured loan has no security.

Each of the kinds works very differently and meets suitable needs according to the preference of the business owner. It completely depends on the individual to make the right decision based on factors and parameters.

Wrapping up

When you take a new business loan, make sure you compare both secured and unsecured business loans. Each one works differently and has its own perks and advantages. 

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