Financial necessities are quite standard in the course of business development. In the growing economic landscape of our country, numerous NBFCs and other commercial platforms have come forward, extending secured and unsecured monetary assistance to every business firm. Hence the question arises: Which is a viable choice. 

The following article is constructed to clear the air of doubts and help every applicant make an informed decision that best synchronizes with their goals.

What are secured and unsecured business loans?

Secured business loans

A secured business loan is a loan offered against a collateral submission to the lender. The credit amount goes to the applicant based on the market value of the submitted security. Throughout the loan, the lender retains the right over the collateral.

Pros and Cons of Secured Business loans

❖ Pros

● Lower interest rates:

Since collateral is submitted, these loans tend to be less risky for lenders. Hence with a good asset and credit history, applicants are eligible for interest at lower rates.

● Higher loan amount:

With valuable assets, applicants are eligible for higher loan amounts

● More extended period for repayment

Since the risk involved is less, borrowers enjoy the flexibility of more extended repayment periods.

● Easier to obtain

Since these loans mainly rely on the collateral submitted, they can be secured by applicants with poor credit history as well.

❖ Cons

● Credit score impact:

If applicants fail to repay the loan, it could significantly impact the credit score of the applicant.

● Probability of asset loss during default:

If the applicant fails to repay, the lenders can seize the valuable asset submitted as collateral

Unsecured business loans

An unsecured business loan is lending offered based on the credit scores and repayment capacity of the applicant. These loans don't require any collateral submission. The loans are sanctioned based on:

  • Business loan documents showcasing the operational history of the company

  • Credit history of the applicant

These loans are generally provided by NBFCs through 'online business loan apply' options available in their digitized custom platforms (websites or apps).

Pros and Cons of Unsecured Business loans

❖ Pros

● No asset submission required.

Hence applicants do not lose their valuable assets through the loan application process.

The loan is processed based on the credit score and operational performance of the company.

● Simpler application process:

Most NBFCs offer a simple digitized method for the loan process. Hence applying companies can receive their amount within 24 hours.

❖ Cons

● Loan amounts could be lesser than loans with collateral submission

However, if the credit history of the applicant and repayment capacity is satisfactory, NBFCs such as Fullerton India sanction up to Rs. 50 Lakhs to small business

● Interest rates could be higher

Since there is no collateral tied to this loan, the interest rates are dependent on the credit history and loan amount borrowed. Since the risk factor is higher in this loan, the interest rates charged by the lender could be higher. 

Which is a viable choice: Secured or Unsecured business loans?

As discussed above, both types of loans have their pros and cons. Deciding the loan type should be made based on what best converges with the goals of the applicant and also the extent of the emergency.

Although secure loans promise higher loan amounts, it is sanctioned based on the market value of the collateral submitted. If the business does not have a creditworthy guarantee, then the probability of approval is bleak. Hence it does not have the flexibility of instant approval.

While unsecured loans are highly flexible, these loans are sanctioned based on the credit history of the applicant and other factors based on the operational history and profit margin of the company. Hence these loans are a viable option for applicants who have immediate emergencies to be addressed.

Final thoughts

Both unsecured and secured business loans are prominent choices among business firms. Choosing and deciding between both must be made after comparing the financial goals of the firm, the business loan eligibility criteria put forward by the lender and interest rates. Applicants can also make use of EMI calculators to make an informed decision.