Broadly speaking, financial institutions offer you loans belonging to two main categories: secured and unsecured. To understand both, consider you want to expand your tailoring business and seek a loan of Rs.20 lakh from a lender. However, the lender insists that you pledge an asset like a vehicle or a property to get this amount. This is what is known as a secured business loan. On the other hand, if the financial institution grants you the Rs.20-lakh loan without any collateral or asset, it is an unsecured business loan.
Which of these loans will best meet your business needs? To understand this, take a look at the nuances of secured and unsecured business loans.
Secured business loan
Collateral determines loan value
When you take a secured business loan, the value of the collateral dictates the amount of finance you are eligible for. Lenders will offer you a percentage of the market value of your asset as a loan. For example, if you are pledging a flat worth Rs.30 lakh as security and your lender offers loans up to 75% of the value of the pledged asset, then you can avail around Rs.22.5 lakh from that particular lender as a loan.
Interest rate is favourable
Secured loans give lenders an opportunity to recover their money in case you default on loan repayment. Since they pose less risk to lender, you stand to get a nominal interest rate with a secured business loan.
Tenor is comfortable
Securing your loan offers you another benefit in the form of a long repayment tenor. Lengthy tenors make repayment easy and stress-free for you, and lenders are able to offer you this since they are sure of repayment.
Unsecured business loan
Hassle-free finances
Since you do not have to pledge any security you are saved the stress of identifying an asset that would have to nominate. Unsecured business loans keep all your assets away from any risk and as you don’t have to meet this requirement, you can complete the application process quicker.
Quick processing and disbursal
Unsecured business loans offer you substantial finances quickly. All evaluation and paperwork surrounding collateral is eliminated, which means you only have to undergo KYC procedures. For instance, Bajaj Finserv approves of your business loan application in just 24 hours! This is ideal if you need finances disbursed swiftly to meet the demands of your business, be it for working capital or to buy inventory.
Pay less with a Flexi Loan
When you take an unsecured business loan from the right lender, you do not need to pay interest on your total credit limit but only on the amount you utilise. Let’s understand this with the Bajaj Finserv Business Loan. Their Flexi Loan feature allows you withdraw from the full sanction as you require and pay through interest-only EMIs, while repaying the principal at the end of the tenor.
For instance, assume that you run a wholesale stationery business and get payments from shop owners at varying intervals. There may be an occasion where payments are delayed, and you need a stop-gap solution to ensure good cash flow. The Flexi Loan feature will come handy here. It enables you to have a large backup fund that you can draw from, based on what your working capital cycle needs. Since interest is applicable only on the amount used, you spend as little as possible.
Secured business loans are reliable when you have a less-than-ideal credit score but still need to borrow money. On the other hand, unsecured business loans are best-suited to meet short-term financial needs, ensure continuous working capital for your business and give your enterprise a quick infusion of funds.
When you choose Business Loan, apart from the Flexi Loan facility you can also get financed up to Rs.30 lakh and a comfortable tenor. To hasten loan disbursal, be sure to check your pre-approved offer before you apply.