Whether you are an aspiring entrepreneur or an established business owner, business finance can be highly beneficial for you. It can get you out of challenging financial situations and help you scale your business.
But before you can reap the rewards of business finance, it is crucial to pick the right loan product. Luckily, there are two kinds of business loans available in the market – secured and unsecured loans. Let’s take a closer look at the two and their key differences.
What are secured loans?
A secured loan is the most straightforward borrowing option for a business owner as it is backed up by a personal or business asset. Simply put, you have to pledge a collateral that matches the value of the loan amount. You can pay the deposit for your business finance in multiple ways, such as:
- Real estate
- Personal property
Additional Read: What Are the Different Types of Secured Business Loans?
What are unsecured loans?
An unsecured loan or credit does not involve any security deposit. Thus, the lender takes more risk in this kind of loan. This means that it pays more attention to your financial history, DTI ratio and creditworthiness before approving the loan. Thus, the business loan eligibility and repayment terms may be slightly different for unsecured loans.
Key differences: Secured and unsecured business loans
Here are a few parameters for comparison to help you choose between a secured vs unsecured business loan.
- Borrowing limit: If you require a higher loan amount, go for a secured loan. But if you have a good CIBIL score and financial history, you can get a decent amount through unsecured loans too.
- Repayment tenure: A secured loan usually offers a longer repayment term as compared to the unsecured finance option. But it is up to you if you want a loan with a longer tenure or not.
- Interest rates: Business loan interest rates for a secured loan are generally lower because the lender already has security in place and can recover the loss in case of a default. Hence, we can say that the higher the risk, the higher the interest rate.
- Disbursal: If you are looking for a loan urgently, you must know that secured loans usually take longer to process as there are more formalities involved. However, an unsecured loan requires minimal documentation and typically takes quicker to process.
Additional Read: Pros and Cons of Unsecured Business Loan
Over to you
So, we can conclude that the collateral determines whether a business loan is secured or unsecured. Now, if you are ready to borrow business finance for your enterprise, you must pick a reliable financier.
Tata Capital is one of the top lending institutions in the market and offers a range of tailored business finance products to serve your requirements. Not only do you get competitive interest rates with us, but you also enjoy a smooth loan application experience. All you have to do is give us a call or visit our website for more information.