Secured business loans and unsecured business loans are the two basic types of business loans you can get as an SME business owner.
The most significant difference between them is the collateral requirement. But there are some other distinctions you should also be aware of when you’re applying for a business loan.
How is a secured business loan different from an unsecured business loan?
1. Loan collateral requirements
When getting a secured business loan, you need to provide the lender with some security in exchange for the loan. This is called collateral. Lenders accept any different kinds of movable and immovable assets as collateral, including owned residential and commercial property, buildings, fixed deposits, and stock. If you are unable to repay your loan, the lender is within their rights to claim legal control of your collateral and sell it to pay off the money you borrowed from them.
Unsecured business loans are named so because they are collateral-free loans. You do not need to provide the lender with any collateral in exchange for the loan, and therefore, these loans are easier and quicker to get.
2. Loan value/size
Lenders determine what business loan amount to lend to you by assessing your business health, financial history, and the value of the collateral you have put up. When you apply for a secured business loan with CreditEnable, we can get eligible SMEs loans ranging from Rs. 15 Lakhs – Rs. 15 Crore.
Conversely, for unsecured business loans lenders, base the loan value on your business transactions and your financial health and history as there is no collateral they can assess. CreditEnable helps our SME customers easily access unsecured business loans ranging from Rs. 1 Lakh Rs. 25 Lakhs in days.
The lack of collateral means you will get a lower loan amount for an unsecured business loan when compared to the amount you could have gotten if you had collateral to put up.
3. Purpose of the business loan
Unsecured business loans are versatile in their use. You can use this cash as working capital, to invest in more inventory, fund your operations, or hire a new employee! There are no restrictions put on the usage of an unsecured business loan as long as you spend it responsibly, and your investment is able to bring you enough profit to pay your EMI obligations every month.
Secured business loans on the other hand are more purpose-driven. There are different types of secured loans you can get for different business needs, and the terms of these loans also vary from purpose to purpose. For example, if you want to invest in new machinery for your business, you can get a business machinery loan designed specifically for this need; you could also use the secured business loan for business expansion, in which case the loan terms may be customized for that purpose.
4. Loan tenors
As unsecured business loans are collateral-free and can be used for a variety of business functions, their loan tenor is short, with the longest repayment period going up to 5 years for some SMEs.
Secured business loans usually have a longer loan repayment period that can go up to 15 – 20 years, depending on your business health! This is because SMEs usually get secured business loans for more long-term business plans like business expansion and diversification. These business goals are unlikely to yield immediate profit and may take longer to bear financial and business success. Lenders understand this and are willing to give you enough time to see your plans flourish and produce results.
5. Business loan interest rates
As expected, the rates of interest lenders offer for secured business loans are lower when compared to the interest rate for unsecured business loans. The main reason for this is collateral. Collateral considerably reduces the risk involved for lenders.
CreditEnable’s SME customers have gotten unsecured business loans with interest rates starting at 14% and secured loans starting around 9.5%. The interest rates the lenders offer depends on multiple factors, including your financial health and your credit history. So, even though two SMEs operating in the same sector may apply for the same type of business loan and loan amount, lenders may offer different interest rates based on their unique circumstances and credit assessments.
When you put up collateral to get a business loan, the lender can trust your business plan and health more as the business may have earned enough for you to invest in assets. They also know that if you were unable to repay your business loan, they can exercise their legal right to possess the collateral you mortgaged to recover their losses.
Alternatively, unsecured business loans are frequently used by younger or smaller-sized businesses that are still developing this asset base and financial stability. So, by giving you an unsecured business loan lenders are checking to see how trustworthy your business is. As you start paying your EMIs on time, you’re building your credit history and proving that your business plan is solid and can help generate a stable cash inflow.
Despite having higher interest rates, repaying your unsecured business loans on time builds your creditworthiness in a short duration, making you eligible for the higher value, lower interest rate business loans in the future.
6. Business loan turnaround time
A business loan turnaround time (TAT) is how long it may take to get your business loan – starting with submitting your application and all your supporting documents to the loan deposited in your bank account.
Lenders usually have a quicker TAT for unsecured business loans as their application and verification process is fairly simple and straightforward. As there is no collateral required for an unsecured business loan, lenders don’t have to spend time verifying and validating your collateral information and value. So, they are able to assess, sanction, and disburse your loan request quickly. CreditEnable has enabled unsecured business loans for our customers in just 2-3 days!
Secured business loans take slightly longer to process. Due to the larger loan size, lenders need to verify all your information, documents, and financial health. Once that is done, they need to verify your collateral ownership and valuate it to decide how much they can lend you. This is why the secured business loan process is slightly more time-consuming.
However, with a lot of the SME lending process automated now, advanced technology is being used that drastically speeds up the credit assessment part. So, it is becoming easier for SMEs to get secured business loans quicker. At CreditEnable, our SME customers have gotten secured business loans in as little as 7 days!
Both secured and unsecured business loans have their benefits, and deciding which one you should apply for ultimately depends on your needs, asset ownership, and how soon you need the money.
Business Loans. Enabled Simply.