Secured vs unsecured Business Loans: Which one is better?
As a small business owner, when you decide to apply for a Business Loan, you should know there are two types of loans available – secured and unsecured. Secured Business Loans are the most popular and common lending option as they are backed by a guarantee or collateral, which could be in the form of your property, business, or any valuable equipment. On the other hand, the provision of a guarantee is not required with unsecured business loans. You can apply for and qualify for an unsecured loan without producing any collateral.
Advantages of secured loans
The advantage of secured Business Loans is that it does not pose many risks to the lending institution and you can have some flexibility in terms of repayment. Loan providers get a cushion to be more flexible because if you default on the repayment they reserve the right to claim the ownership of the person or business assets you have provided as a guarantee and sell it to recover the loan amount.
Disadvantages of secured loans
The disadvantage of secured loans is that the lending institution has the legal right to seize your asset with a court order if required. So, you should be careful while giving away your assets as collateral. Make sure that it does not result in significant business loss.
Unsecured Business Loans are ideal for business owners with good personal credit scores. Here the lending institution carries the highest risk in case of any default payments. Therefore, they come with stringent business loan eligibility criteria like credit score requirements and high-interest rates. Defaulting an unsecured loan will result in the lending institution taking legal action against you or leaving the job to a collection agency to recover the amount or sell your remaining debt to a third party.
Advantages of unsecured loans
The advantage of unsecured loans is that they have no lengthy approval process because of the absence of collateral. Most importantly, if your business bears heavy losses, unsecured loans may not be a threat to your assets.
Disadvantages of unsecured loans
The disadvantage of unsecured business loans is that they are difficult to qualify for as they require high credit score requirements, are made available at high-interest rates, and offer short repayment tenure. The lending institution will check several facts before finalizing your unsecured loan, such as the age of your business, whether your company is earning a considerable amount of revenue, or if you have an excellent personal credit history. Defaulting on unsecured loans leads to financial damage and falling credit. So, you must establish your business before applying for unsecured loans.
How to get a Business Loan?
The business loan eligibility criteria vary from institution to institution. The annual turnover for a private limited company should be more than one crore. It should be in operation for more than three years. You must complete the age of 21 years while applying for a business loan and should not be more than 65 years at the time of maturity of the loan. However, qualifying for a business Loan depends on various factors like financial history, credit score, repayment history, and business stability.
Unsecured Business Loans are a good option if you are eligible for them, as you do not have to provide any collateral. In contrast, secured Business Loans or Loan Against Property are good if you need a bigger loan amount and can repay it responsibly. In all, both loans have some benefits also attached to them. So, choosing your loan depends on your unique financial requirements, business status, and credit rating is important.