There are primarily two kinds of business loans –
- Secured
- Unsecured
Business owners should ideally know the distinctions between the two before they apply. Because each type of business loan has different criteria, which will directly influence your loan terms and the risk involved.
Below, we discuss how the two different business loans differ from one another.
Secured business loans
A secured business loan requires some form of collateral from the borrower to back the debt risk. Lenders use the collateral as a “security” to make up for the payment defaults, if any.
Now, collaterals are usually assets which can be liquidated easily, such as real estate, inventory, undeveloped piece of land, equipment, or accounts receivable.
Secured debts also have structurally low financial liability, so they allow a company to obtain finance at a lower business loan interest rates. Besides, financial institutions readily lend substantial sums of money at competitive terms on secured loans.
Most importantly, secured loans can improve the business credit scores remarkably if the EMI payments are made timely. Since the secured loans are typically longer in tenure, they allow for convenient repayments and thus, a better credit history.
But do note, most lenders check the collateral value to settle the loan amount. Business owners should, therefore, have a recent assessment to obtain a correct estimate on the collateral value and receive favourable loan terms.
Unsecured business loans
Like other unsecured debts, an unsecured business loan does not require collateral. Lenders usually approve the loan based on the creditworthiness of the borrower, determined via credit scores, CIR assessment, monthly income, and more.
Unsecured business loans are also comparatively short, with a maximum tenure of five years. Also, because such debts do not require a collateral, they are naturally disbursed faster since minimal documentation is involved.
However, they can be challenging to obtain for a small business or startup, which lack the required credit history to offset the risk involved. In such cases, lenders usually want the loan term to be over quickly, so the loans are shorter than secured debts.
While mostly available at fixed interest rates, a business can obtain an unsecured loan at a variable interest rate by persuading the chosen lender. But in any case, the rates are typically high, even more than what business receive on credit cards.
Because unsecured debts demand excellent credit history, business owners should ideally prepare well in advance. Monitor monthly finance and secure a Credit Information Report or CIR copy to ensure the report contains updated credit information only.
Use a business loan EMI calculator to obtain accurate estimations on a loan amount which meets your crucial business needs and repayment capacity with ease.
The bottom line
As explained above, business finance comes in different forms, each with distinct merits and downsides. To ensure a lucrative deal, therefore, business owners should first research the market and understand the loans inside out.
Only then, they can procure the necessary funds without a significant financial strain. And meet the revenue objective effectively.
