Difference Between Secured and Unsecured Business Loans15 Oct 2019
To start a business and to expand, you need funds. A business loan is the best option available in the market which will meet your requirement. A right type of business loan will support you to make the right decisions in your business.
You need to be clear about the purpose of taking a business loan. A new start-up needs loans to set up the infrastructure and the business overall however an established company may require loans to buy equipment, machinery or business expansion.
A borrower needs to be aware of the types before applying for any business loan to fit their requirements. Below is the explanation of two types of business loan, make sure to choose the right one for you.
Secured Business Loans
With a secured loan, the borrower pledges an asset such as property, plant, equipment, stock or vehicles against the debt. Whereas no collateral requires for an unsecured loan. Secured business
loans are different from unsecured business loans because you need to offer some type of collateral to the lender in case you default on your payments for the loan.
In this type of loan, the rate of interest is less compared to the unsecured business loan. This type of business loan is easy to get due to low risk.
Secured loans are limited by the fair value of the asset promised as collateral. Most of the entrepreneur at their earlier stage of the business opt for asset-backed loans to grow their business. Secured lending is often known as asset-backed lending — because its business lending backed by
Unsecured Business Loans
In the case of unsecured business loans, the risk is high if we think from lenders' perspective hence the rate of interest is high compared to secured loans. In this type of loan, the borrower doesn't have to pledge any collateral to avail of this loan.
The loan approval depends upon the past credit history, credit rating, CIBIL and other metrics hence it takes time to approve. If all the metrics are met lenders can disburse the loan within few days. When there is no collateral the lender wants the money to be paid back as soon as possible to reduce the risk. The term of an unsecured business loan is shorter than the term of a secured business loan.
An unsecured business loan is a good option for an established business owner who wants to expand their business and willing to pay the higher interest rate as the loan process is flexible and get larger amounts as per their requirements.