Whether you want to purchase fresh inventory, expand your business, procure new equipment or technology – you need funds. The entrepreneur usually avails a business loan to meet these needs. The loan can be secured or unsecured one.
Before applying for any type of Business Loan, you must understand the concept, advantages & disadvantages of both types of loans.
1. Secured Loan: is a loan in which the loan borrower has to keep some asset (Property, Gold, Inventory etc) in form of collateral for availing a loan.
In case the borrower defaults, the lender takes possession of the asset, it & recover the money.
Example: Home Loan, Commercial Vehicle Loan, Tractor Loan, Gold Loan, Car Loan, Loan Against Property, Loan Against Securities etc.
a) Advantages of Secured Loan
– Can get higher loan amount.
– Credit policy will be lenient.
– Lower interest rates than an unsecured loan.
b) Disadvantages of Secured Loan
– Need to pay upfront fees for valuation of your asset.
– The loan can be utilized for purchasing a specific asset.
– In case of default, the lender has a legal right to seize your lien property.
2. Unsecured Loan: is a loan that is given on the basis of customer creditworthiness. The lender will sanction loan without taking any collateral from the borrower. A sound credit score, good repayment history, healthy banking habits & audited financials – are few parameters which motivate fund provider to extend loans to you.
If a loan borrower defaults on an unsecured loan, the fund provider don’t have any claim on your property. In such cases, the fund provider either visit the customer office/house to collect the payments or take the help of court for collection of remaining dues.
Example: Personal Loan, Credit Cards, & Some Education Loans.
a) Advantages of Unsecured Loan
– Available to both tenants and homeowner.
– You can utilize your property for raising additional funds.
– In case of default, the lender can’t seize your lien property.
b) Disadvantages of Unsecured Loan
– Heavy paperwork involved.
– The loan amount may be smaller.
– Rejection ratio in such type of loans is very high.
It’s not about Secured Loan vs Unsecured Loan. Depend upon needs & resources of the borrower, the loans are availed in the market. You can get even both type of loans at the same point of time.
For new start-ups, a secured loan is usually a most viable option. Alternatively, they can raise funds from friends, relatives, money lenders, crowdsourcing, angel investors etc. The unsecured business loan is generally offered to established business owners.
Hope this article has resolved most of your query. If you have any query related to business loans, then you can get free consultation here.