Are Unsecured Business Loans Better than Secured Business Loans?

Many Indian entrepreneurs or small business owners face a painstaking dilemma while seeking business funding. They often get confused about whether to opt for a secured or unsecured business loan. Both types of financing have benefits and drawbacks, and the choice between them depends upon various factors, including the financial health of the business, growth plans, and the businessperson’s credit score.

What are secured business loans?

Secured business loans require collateral, such as real estate, equipment, and other valuable assets, to obtain the credit amount. Since there is security, the lender offers low interest rates and easier terms. Secured business loans are especially good for businesses with valuable assets looking for bigger credit amounts or better interest rates.

Types of secured business loans in India

There are several secured business loans available in India, and a few of them are mentioned below: 

• Term loans: These are loans advanced in a single lump sum and to be repaid with interest over a fixed period. Business assets are used as collateral.
• Equipment finance: Equipment finance can essentially be regarded as one of the loan options used by businesses for purchasing new equipment or for upgrading current ones. The loan is granted against the support of the equipment itself as collateral.
• Business loan against property: In this credit type, businesses can obtain sizable financing using their business or residential property as security. The advantage here is the longer tenure and lower interest rate.
• Gold loan: Here, the gold of the applicant is used as collateral in exchange for speedy finance. The borrower can obtain quick sanctioning, easy repayment, and relatively lower interest rates.
• Project loans: In this category, big projects involving infrastructure development or real estate construction are funded with sanctioned money. The sum allotted to the loan applicant is often disbursed in phases corresponding to the different stages of the work, such as planning and execution.
  

What are unsecured business loans?

Unsecured business loans for MSMEs do not demand any security but are based on the borrower’s creditworthiness and financial history. Most of these credit types carry higher interest rates and tougher eligibility criteria. Yet, they allow easy access to finances and are well suited for businesses without many assets.

Types of unsecured business loans in India

There are many types of unsecured business loans available in India, such as:

• Working capital loan: This is a short-term loan made available to businesses to manage their day-to-day operations smoothly. It can be used for various expenses, including the purchase of inventories, payment of salaries, and other costs.
• Cash credit: It is another type of working capital loan from which businesses can withdraw funds up to a certain limit. Interest is charged only on the amount utilised.
• Overdraft facility: Businesses can withdraw amounts over and above the available funds in their account up to a limit to meet immediate short-term demands.
• Letter of credit: This is a financial contract issued by the bank of an importer or buyer to the seller, guaranteeing that money will be received from the buyer on the due date and time. It plays an important role in reducing the risks of international transactions.
• Factoring refers to a business selling its accounts receivable, or invoices, at a discount to acquire immediate cash. The process reduces the time taken in collections and helps improve a business’s cash flow.
• Startup loans: These loans are specifically designed for newly established companies. They often come with flexible terms, which can benefit early-stage growth. The primary challenges when applying for this type of loan are the dearth of collaterals and restricted operating history.

Advantages and disadvantages of unsecured business loans

Although unsecured loans in India offer several benefits, they also come with some drawbacks. Let’s check the pros and cons.

Advantages:

• No assets are required as collateral
• May offer quick funding
• Available to different kinds of borrowers

Disadvantages:

• Interest rates could be much steeper
• Requirements may be more stringent
• It may require a personal guarantee
  

Is an unsecured business loan better than a secured business loan?

The choice between an unsecured and a secured business loan would depend on the business’s financial condition, creditworthiness, and growth plans. The former would be perfect for firms with very few or zero assets, whereas the latter is the answer when huge funding is required or better interest rates are desired.

Business loans have become common in the Indian market today. Owing to the quick availability of the best online unsecured loans, enterprises do not encounter much hassle in gaining capital. However, most lenders demand higher interest rates and lay down strict rules for accessing funds. 

Secured business loans normally have lower interest rates and better terms for the business but always require collateral, which is usually a big problem for many businesses. This may become a hurdle, especially when businesses have no valuable assets.

Entrepreneurs and small business proprietors must weigh their options and consider interest rates, repayment terms, and the requirement for collateral when making the best choice.

Conclusion

In short, secured and unsecured business loans both have pros and cons, and what suits a business best depends on the case. Entrepreneurs and small business owners should make decisions appropriate to their businesses after carefully considering the interest rates, repayment terms, and collateral requirements of both loan types.

At TallyCapital, we believe that every business is unique, with different challenges and potential. Thus, we provide customised unsecured business loans that fit your needs. We won’t stuff you with complicated loan structures; instead, we help you realise your business goals by listening to what you need and carefully formulating solutions that will best suit your needs.

Read more: 5 Advantages of Taking Unsecured Loans