Ever wondered what’s the difference between a secured and unsecured business loan and the impact they have on your business performance? To put it in a very straightforward manner, when a loan is provided against collateral then, such a business loan is called a secured business loan. When a loan does not have any collateral involved but is provided solely by assessing the economic credentials of the borrower then it is called an unsecured business loan. The entire business loan structure is based on the foundation of these two types of business loans.
Secured Vs Unsecured Business Loan
- The list of collaterals is much more extensive in current times for a secured business loan. These include (but not limited to) real estate, bank accounts, vehicles, gold or valuable metals, mutual funds, and stocks. In case of an unsecured business loan, it is the credit points that make the borrower eligible for the business loan in addition to having a long and healthy relationship with the bank / NBFC (Non-Banking Financial Institution)
- Usually, in case of a secured business loan, the loan repayment tenure is higher and the interest rate is lower as compared to that of an unsecured business loan. The presence or absence of a security asset against the loan in question is what makes the real difference.
- Secured business loans provide the borrower with an option of a bigger business loan amount which is comparatively difficult in case of an unsecured loan. The bank may demand a very high CIBIL score (credit points) or a spotless financial history for a big amount in an unsecured business loan structure.
- Unsecured business loans give an opportunity to build the borrower’s business credit. This happens, when the lender provides reports to the credit bureau about the timely repayment of the business loan with substantial proofs which then helps build and strengthen the business credit profile of the borrower. In case of a secured business loan, the valuation of the asset or collateral is the only way in which the loan can be availed.
- In case of a secured business loan, the asset is almost immediately seized by the respective bank in case of failure of payment. The risk of losing the security asset is absent in case of an unsecured business loan.
- Chances of full repayment of the business loan are much more guaranteed in a secured business loan as most borrowers have their security asset in the hands of the bank. This guarantee is comparatively less in an unsecured business loan.
The need for working capital for small or big business can be best ensured through business loans. Maintaining a good credit score, reclaiming your current assets by repaying the loan and building your business should all be of equal priority during this time. Hence proper communication with and guidance from banks and credential business lenders are very crucial as they help you link your needs to the right kind of capital that you may be looking for.
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