Secured Vs Unsecured Business Loans: The Difference and How it Matters for SMEs

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To sustain their business growth, small and medium enterprises (SMEs) sometimes need additional working capital, and the most direct way of getting it is to apply for a loan.

With business loans coming from banks, non-banking finance companies (NBFCs) and private money lenders, SMEs have multiple sources to get funding for their operations and expansion. However, these credit options have their pros and cons and should be understood to choose the most helpful alternative.

Secured vs Unsecured Business Loan

Most companies are familiar with the idea of a secured business loan that requires them to offer the lender some collateral as a security against the funding provided. The credit here is issued when the borrower hypothecates a financial asset to the lender. The hypothecation ends only when the entire principal, together with interest and any other associated charges, is fully paid off.

Banks and most other conventional sources of finance are more willing to offer secured loans because from the lender’s point of view, these carry less risk than unsecured funding.

The main advantage for a borrower taking a secured business loan is that the interest on such credit is lower since a guarantee of their asset backs the loan.

Conversely, the challenge is that lenders, particularly banks, accept only selective assets as collateral. They need to ascertain that such an asset can be liquidated in minimum time in case the lender defaults on payment. Due to this condition, many SMEs find it difficult to get secured loans. They may not have assets that are considered as relevant or sufficiently valuable by the lender.

An unsecured business loan, on the other hand, is granted without any collateral. A non-banking finance company with a digital lending model offers such loans based on the creditworthiness of borrowers. If a business has a successful operational history of at least one year, and there are no blots on its previous credit history, it is eligible to get its unsecured business loan from a digitally operating NBFC, also known as a FinTech company.

For an enterprise that has no collateral for business loans, it is natural to opt for an unsecured loan even though the interest charged on this is slightly higher than on secured loans. However, some FinTech companies have created additional benefits with their policies that make unsecured business loan better than secured loans on multiple fronts.

While looking at secured vs unsecured business loan, these are some of the advantages that make the latter more valuable for start-ups and SMEs:

  • An unsecured business loan is available for short terms – borrowers can take a working capital loan for a tenure of less than one year and thus avoid the burden of debt on long term.
  • A FinTech lending company usually has a fully digital application process for its unsecured loans – it takes less than 10 minutes to complete the application and the documents to verify the information therein can also be uploaded online.
  • The time taken to receive funds from a FinTech in the business bank account is less than a week – the application is usually reviewed on the same day when it is submitted, and, if approved, the sum is disbursed in the next 2-3 business days.
  • A loan processing fee of up to 2% and the interest rate are usually the only charges on a FinTech company’s unsecured business loan – the borrowers do not have to pay any documentation fee, loan insurance premium, legal fee and other hidden charges.
  • The repayment options are more flexible for unsecured loans issued by FinTechs – the borrowers can pay off the loan sooner than the predetermined schedule, and maybe charged a nominal pre-closure charge for making the payment.

For an SME that does not have financial assets to hypothecate and needs faster access to cash, will find unsecured business loan better than secured funding.

Here is a summarised view of the features for Secured Vs Unsecured Business Loan:

Secured Business loans from Institutional lendersUnsecured business loans from FinTech companies
Collateral requiredBacked by a financial asset for collateralNo collateral / Security
Advertised interest rate (annual)Between 12% and 24%Between 18% and 24%
Loan processing fee>= 2%<= 2%
Extra chargesMay have extra charges for documentation, loan insurance and other statutory requirementsNo extra or hidden charges
Time to get funds into account1 to 6 weeks72 hours
Loan application processDigital and paper-based, document-intensive loan applicationFully digitalised loan application and document submission
Repayment of loanOnly through EMIsFlexible repayment options

Capital Float is a leading FinTech company that asks for no collateral for business loans. We have customised our loans for a variety of business purposes and working capital needs. Our short-term unsecured business loans are issued purely on the creditworthiness of the borrowers and the potential of an organisation to pay back in time. We evaluate every loan application within minutes of its submission to provide the decision on the same day.

Apply for unsecured business loan

 

If you have an attractive business opportunity to capitalise upon, do not put off your plans. Talk to a representative in our customer service team at 1800 419 0999 and avail yourself of the benefits of a loan without collateral.

The post Secured Vs Unsecured Business Loans: The Difference and How it Matters for SMEs appeared first on forex trading news for beginners.

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