Availing Business Loans With or Without Collateral - Business Loan Blog - Tata Capital

Should You Avail of a Business Loan With or Without Collateral?

Mar 06, 2017

The best solution to obtain finance to fund a start-up or expansion of an existing enterprise is to borrow a business loan. Such loans help in covering working capital costs as well as provide funds for machinery, acquisition of land, recruitment, and purchase of raw materials.

There are two types of business loans offered by financial institutions namely secured and unsecured loans. A secured loan requires collateral to be kept against the loan. It acts as a security in case you fail to make timely payments of your Equated Monthly Installments (EMIs). You may keep any business asset as collateral.

Unsecured loan, on the other hand, does not require you to pledge collateral to obtain the loan. As there is no requirement of a security, it becomes important to fulfill the minimum income and credit requirements. Most lenders require the business to have a minimum turnover, as stated by them. It is also necessary that the promoter has a good credit score.

The decision to borrow a secured or unsecured business loan depends on the nature of the business. In some cases, firms may not have any collateral to pledge against the loan. Start-ups may not possess a huge asset, and may, therefore, opt for an unsecured loan. There are numerous advantages and disadvantages of obtaining an unsecured loan.

Advantages of unsecured loan

The main benefit of such a loan is that there is no requirement of any security such as property, vehicles, or any other asset. Thus, you may establish a good credit without any loss of your assets even if you default on your payments. The financier does not have any right to seize your assets unless a court order is obtained. Another advantage of an unsecured loan is its easy availability. Most lenders provide loans without any security up to a certain borrowing limit.

Disadvantages of unsecured loans

The main downside of unsecured loans is the high interest rate. You have to pay a higher amount over the loan tenure as compared to a secured loan. This is because in case you fail to make repayments, the lender does not have any collateral to cover up for the losses incurred. Another disadvantage of such a loan is the difficulty in obtaining an approval. If your business has a poor credit score, there is a high chance of your loan application getting rejected.

Making the right choice

The decision to borrow a secured or unsecured loan solely depends on the existing asset holdings of your business. If you have numerous assets, then obtaining a loan without collateral is the best solution. You will save significant amount through a lower interest rate. On the other hand, if your business is a start-up and does not have any asset possessions, you may opt for an unsecured loan. You may also conveniently avail of a business loan online.

Remember, defaulting on any type of loan, whether secured or unsecured, will have a negative impact on the business' credit rating. It is, therefore, important to make repayments on time, thus ensuring that your borrowing decision is a smart one.