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| October 12, 2021

Secured vs Unsecured Business Loans: All You Need to Know

You must have come across terms like ‘secured loans’ and ‘unsecured loans’ online when researching about business loans. Well, secured loans and unsecured loans are the two most basic types of loans that banks/NBFCs offers to business owners. Being familiar with them is quintessential for a business owner or for those planning to start a business.

In simple words, a secured loan is the one that lays the burden of risk on the borrower; an unsecured business loan is the one that lays the risk more on the lender than the borrower.

Depending on several factors like the type of lender, the assets that you own, credit history, plan of the funds, etc., you become eligible for secured or unsecured loans. Let’s see what secured business loans and unsecured loans are in detail.

Secured Loans: An Overview

The term ‘collateral’ is very likely to pop up while discussing the terms of secured loans with banks or NBFCs. Collateral is an object/property/ or anything else that you pledge as ''security'' for loan repayment. If in case you are unable to repay the loan, the bank takes the collateral. Secured loans are considered riskier because of this reason.

In the case of secured business loans, business-related equipment or devices serve as collateral. If your repayments are defaulted upon and you are unable to pay back the borrowed loan amount, the lender will take possession of the collateral. Thereafter, they might resell the collateral to balance the non-paid amount. Hence, getting secured business loans will always have the need for collateral. Do keep in mind that a considerable time frame is afforded for the repayment; however, if you continue missing on the payments, the financial institution can take action against you. In this case, seizing your collateral will be the first step.

Apart from secured business loans, other examples of secured loans include: –

  • Mortgages – property loans; the property itself acts as collateral.

  • Construction loans – loans that allow you to build a property on your land. Here too, the property acts as collateral.

  • Auto loans – loans that let you buy a vehicle; secured the vehicle itself.

  • Gold loans – here, you can get a loan against your gold jewellery, gold coin, etc. The gold ornament/coin is the collateral.

Unsecured Loans: An Overview

As evident by the name, an unsecured loan is a loan without collateral where the financial institution lends you the amount based on creditworthiness. Banks and NBFCs in India offer unsecured loans for education, property improvement, and plenty of other reasons. Even personal loans and credit card purchases come under unsecured loans. Getting an unsecured business loan is a little difficult as the loan amounts are usually pretty huge. However, if your requirement is low, you may get an unsecured loan for business. Having said that, this solely depends on the bank or the NBFC and their terms and policies. Approval of loans without collateral can be time-consuming as your creditworthiness is the only factor. If you have a strong credit history and a reliable cash flow, approvals are easily given by the financial institution. However, with bad credit history, it can take an extended period of time. If you want smaller unsecured loans for small businesses or new businesses, make sure that your capital requirement is well-defined and that your credit history is commendable.

Secured Business Loans vs Unsecured Loans: Pros to Look For

The major benefits of getting secured loans vs unsecured business loans include: –

Secured Loans Unsecured Loans
Lower interest rates No need for collaterals
Higher limits of borrowing amount No risk of anything that you love
Longer repayment tenures Smaller unsecured working capital loans are easier to borrow.

Secured Loans vs. Unsecured Business Loans: Cons that You Should Know of

Secured Loans Unsecured Loans
You need to provide the collateral e.g. a house, vehicle, business assets, gold, etc. With unsecured loans, your personal liability increases.
If you don’t repay the borrowed loan amount, you will lose the collateral. You may not need to pledge collateral but unsecured business loans interest rates are comparatively higher.
Even though longer repayment tenure makes repaying the loan easier, it also means that you will be in debt for a longer time. There are limitations on the loan amounts you can get. Also, the repayment tenure is short.

Both secured loans and loans without collateral come with benefits and disadvantages. However, the cons can be sidelined. Depending on your situation, you can borrow a loan amount that is feasible for you and select a repayment tenure as per your convenience. At the end of the day, it is prudent to plan out the financial needs of your business before applying for a loan.

Muthoot Finance is one of India’s No. 1 Most Trusted Financial Services Brand*. You can avail services like gold loans, forex services, insurance, vehicle loans, and much more with us. Visit your nearest Muthoot Finance branch to understand how our wide array of financial services can be of benefit to you.

*As per Power of Trust TRA Brand Trust Report (2016-2020)

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