A business loan can be availed for the variety of reasons ranging from the working capital requirement to business expansion. The reasons for loan requirement are many but there are basically two types of loans available, secured and unsecured loans. To understand which type of loan will be best suitable for your business needs it’s important to know the basic differences between the two.
Secured loans as the name suggests is a loan which is secured by way of borrower giving a security/collateral against the funds borrowed. The lender attains the title or gets a lien on the property which is hypothecated for borrowing the loan.
Unsecured loan, on the other hand, does not require placing any collateral for the borrowed funds. The lender here only gets interest amount and processing charge for the funds lent out. It is usually borrowed for working capital requirements or by small business as they most often don’t have any valuable asset to place as security. Thus, the unsecured loan is also referred to as a small business loan.
Below we have discussed the basic differences between secured business loan and unsecured business loan:
Secured Business Loan
Unsecured Business Loan
|1.||It is backed by valuable asset placed as collateral with the lending institution for availing a loan.||This loan is not backed by any asset placed as collateral with the lender.|
|2.||The time taken for loan processing from the day of application to the day of loan amount getting disbursed is usually 1 month or more. As banks and NBFCs ascertain the value of an asset which is proposed to be placed as collateral and also the verification of the borrower.||On the other hand, small business loan or unsecured gets processed usually within 15 days from the day all documents are duly submitted. In this case, the borrower’s credibility and its ability to repay the loan along with interest in the stipulated time is checked.|
|3.||The processing fees in this loan are usually from 2-5% of the loan amount and might even be required to pay before the loan gets approved depending upon the lending institution’s policy.||The processing fees in this type of loan are usually less than 2% of the loan amount and are often deducted from the loan amount at the time of disbursement.|
|4.||The interest rate in this loan ranges from 9-15%.||The interest rate in small business loan ranges from 12.5%-24%.|
|5.||Extra charges like charges for documentation, charges for loan insurance, or other statutory requirements could be there.||Under this type of loan, no hidden or extra charges are levied.|
|6.||The business loan usually carry single repayment option of EMIs.||Small business loan or unsecured loan can also have flexible repayment options..|
|7.||The maximum tenure in this loan can go up to 20 years.||The maximum tenure in this loan is 5 years.|
f you are an SME then availing small business loan for the working capital requirement or increasing the credit business, is the best option.