Turning your small business idea into a firm was no easy task and managing its finances can be equally difficult. Your firm might be facing monetary issues with the expenses piling up and not having sufficient capital to fulfil them. A great way to manage these is to get a credit and manage the cash flow until the profits start flowing in once again. But, with a wide variety of options available, it can be difficult to choose.
Before taking the leap and selecting an offer, check whether the loan falls under the secured or unsecured category. Both these come with their own set of pros and cons. It is important to identify your requirements and ascertain which of the two fit in with your requirements. Let us understand the two categories in further detail.
Secured Business Loans
Under the secured category, to get the loan you are required to pledge an asset as collateral to borrow the required money. The most common form of secured business loans is loan taken against mortgaged property. This is because the asset can be pledged for a longer tenure and has a high value, allowing the borrower to get a high amount sanctioned.
In addition to these, you can also keep government securities, savings accounts, gold, precious metals, and fixed deposits as a mortgage to get a business loan. Stocks, inventory, and equipment can also be held as collateral by the lending institute. The mortgaged asset can be a company-owned or personal asset.
Types of Secured Business Loans
Here is a list of some common types of secured business loans to consider.
Secured Term Loan
With a secured business term loan, you borrow the required amount by pledging a personal guarantee as collateral or mortgaging an asset. The interest rate and tenure are fixed at the start of the loan term and the repayment schedule is fixed.
Equipment Financing is a credit facility that enables you to finance all the machinery and equipment-related needs of your business. Under this, the equipment purchased is considered as collateral by the lending institution. As per this loan, most lenders offer pre-approved amounts to borrowers.
Inventory financing, also known as warehouse financing, is a revolving line of credit or a short-term loan. It is used to purchase products and then sell them in the near future to conduct business. Here the items purchased are considered as collaterals. This type of credit is usually taken by small privately-owned businesses.
Unsecured Business Loans
If you are an entrepreneur who needs money to turn their small business idea into a reality, an unsecured loan for business can help. These do not require you to pledge any asset as collateral. Your eligibility depends on your credit score, business revenue, and Profit & Loss statements.
The firm’s Debt-to-Income (DTI) ratio and creditworthiness play a major role in determining the offer a lender makes under this category. In the case of unsecured business loans, approval and disbursement is usually quite fast. The interest rates offered are usually on high when compared to secured loans. Additionally, the eligibility criteria is more stringent in the case of an unsecured business loan.
Types of Unsecured Business Loans
Here is a list of some common types of unsecured loans for business to consider.
Working Capital Loan
As the name suggests, a working capital loan ensures that there is constant cash flow in the company. The amount borrowed is used to fulfil basic operational requirements like paying for purchase orders, utility bills, office rent, managing inventory, and so on.
Loan on Business Credit Card
You can get a pre-approved loan on your business credit card. The lender evaluates the payments and transactions made using your card and pre-approves a certain amount. If you are eligible, the amount sanctioned will be transferred to your bank account almost instantly.
Government-backed MSME Loans
Your company is no longer a small business idea. To help it achieve its full potential, getting the right finance is essential. The government believes the same and has launched multiple financing programmes for Micro, Small, and Medium Enterprises (MSME). You can take advantage of schemes like the Pradhan Mantri MUDRA Yojana (PMMY), Credit Guarantee Schemes (CGS), and Stand-up India to borrow the required amount.
Difference Between Secured & Unsecured Business Loans
Now that we have understood the concept, it is now time to understand the difference. Here is a comparison between secured and unsecured loans, which can help you take the right decision.
Secured Business Loans
Unsecured Business Loans
|Collaterals involved||No collateral required|
|Comparatively lower interest rates||Comparatively higher interest rates|
|Comparatively longer repayment tenures offered||Comparatively shorter repayment tenures offered|
|Comparatively easy eligibility criteria||Comparatively stringent eligibility criteria|
|Loan amount depends on the value of the asset mortgaged||Loan amount depends on the company’s DTI and creditworthiness|
|No credit score requirement||Requires good credit score|
|Comparatively, approval process takes more time||Comparatively, quicker approval process|
|Preferable for borrowing large amounts||Preferable for borrowing smaller amounts|
|Borrowers can get tax benefits||Borrowers do not get any tax benefits|
Now that you have understood the difference between secured and unsecured loans, it is time to get started. Grow your small business idea into a multinational firm with the help of a business loan.
Use the information discussed above to ascertain the type of loan that suits your requirements the best. Research and compare before applying for a business loan. Well, what are you waiting for? Go look at the various business loan offers available today!