Small and medium enterprises form the backbone of India’s economy, employing a significant portion of the country’s workforce and are the key to solving the unemployment problem. However, these small businesses often need to take loans to fund their working capital flow, which is essential for their survival. Quite a few financial institutions have stepped up to help these small and medium industries by offering credit in the form of business loans. Now, these loans are available in two forms – Secured Loans and Unsecured Loans.
Most businesses prefer unsecured business loans
because they don’t have to pledge their assets as security. Therefore, from the borrower’s perspective, unsecured businesses loans are considered safer and more secured than secured loans.
Here are some of the major benefits of opting for unsecured business finance.
- Less risk to the borrower – The primary difference between a secured and an unsecured business loan is the collateral. Secured business loans require the borrower to pledge their asset as security, which means less risk for the lender. Unsecured business loans, on the other hand, do not require the borrower to pledge any collateral as security, which means that if they default, their personal or business assets will not be at risk. Now, most start-ups do not have any assets to pledge as security. So, thanks to the availability of unsecured loans, even these ventures can avail credit to fund their business needs.
- Quicker processing and less intensive documentation – The business loan disbursal process usually takes time because the lender has to carefully vet every aspect of the application, like the borrower’s financial condition, business reports, plans etc. This is more so in case of secured business loans, as the borrower has to furnish additional documents in terms of asset papers, and the lender has to evaluate the value of the collateral before determining the amount of loan to be granted. This is a lengthy and time-consuming process. The unsecured business loan disbursal process is relatively easier and faster too.
- Variety in unsecured business finance – Thanks to advances in technology, unsecured business loans can be availed in the form of overdraft facility, term loans, business line of credit, business credit card etc.
- Simple and fast disbursement process – These days, a large number of innovative financial institutions offer credit facilities to individuals and businesses. These companies leverage technology to accept applications and require borrowers to upload copies of documents online without any hassle. Online applications get processed a lot faster and the loans are usually disbursed within 72 hours.
Having said that, secured loans have certain advantages over unsecured loans in terms of:-
- No sharing of ownership – Many small businesses opt for alternate financing from venture capitalists or angel investors to set up and expand their business. However, to avail funds, the business owners have to share ownership rights in the form of profit sharing. In case of unsecured business loans, the owner does not have to risk anything- neither his assets nor his stake in the business..
- It’s alright to have a less-than perfect credit score – Secured loans are backed by property, and therefore, lenders are willing to lend to borrowers who do have a satisfactory credit score too. On the other hand, in case of unsecured business loans, lenders are not ready to lend to borrowers who do not have a good credit score.
- Low interest rates – There’s less risk to the lender in case of secured loans, and therefore, lenders are willing to offer loans at low rates of interest.
- Long repayment period – Secured loans have long repayment tenures, and therefore, you get more time to pay off the debt.
However, the major disadvantage with secured loans that far outweighs its advantages is the risk to the borrower. The borrower stands to lose his property or other valuable assets in case of default. Also, because the repayment tenure is long, the borrower ends up paying more in terms of interest cost.
Lenders offering unsecured business loans have their own measures in place for protecting their interests, like charging higher rates of interest, personal guarantee, or placing a lien on your accounts. Also, the loan tenure for unsecured loans is shorter. The good thing about that is, you become debt-free faster and pay much less towards interest costs.
Thus, many business owners prefer to avail unsecured business loans for their business needs. However, it is important for a business owner to evaluate all their options carefully, weighing the pros and cons, in order to find the right funding option. They should also go through the eligibility criterion for business loans and other terms, so that they are in a position to negotiate with the lender for the best unsecured business loans
at attractive rates.