Businessman looking forward to avail a business loan always get confused between an unsecured business loan and secured business loan. And to determine this, they must know the difference between the two. Even after more than 2 years of GST implementation and demonetization in India, many businesses are still recovering from its after effects. They are finding it hard to manage the finances for their business – it has become a complicated process for them. And this has disturbed the cash rotation cycle of their business as well.
That said, the finances are very important for a business to run and expand. And any shortfall of finances may hit their business hard. So, the business owners look forward to availing a loan for business to cope up with the situation. However, the next problem that they face is to decide between a business loan without collateral or with collateral.
As said earlier, in order to make the right choice between these two options available at disposal, the businessman must know the difference between the two.
What are Unsecured Business Loans?
The unsecured business loans are business loans without collateral, i.e. there is no need for the business owner to provide collateral to back the loan amount. The business loans are sanctioned on the basis of the lender’s creditworthiness which the lenders measure on the basis of the CIBIL score and a few other factors.
The amount availed under this type of business loan can be used for any purpose related to business. The usual repayment tenure for collateral-free business loans ranges between 6 months to 24 months. These loans are ideal for small business owners due to no collateral. They can use the loan amount to meet urgent cash requirements. They can pay salaries and wages, supplier payments, utility bills, etc.
You can apply for a business loan without security through online channels. You can visit the website of the lender and acquire all the details you require. You can also compare loans and find the one that best suits your needs. Also, the online channels make it easy to apply for a loan and submit documents. The processing and disbursement of business loans without collateral are very fast.
Unsecured Business Loans VS Secured Business Loans
While applying for a loan for business, the business owner is required to choose between two – secured and unsecured business loans. Both types of loans have their own set of advantages and disadvantages. However, unsecured loans have numerous benefits for small business owners over secured loans. Following are the significant advantages of availing collateral-free business loans over collateral business loans:
- Collateral: The first and foremost difference between a secured and unsecured loan is the availability of collateral. For unsecured business loans, there is no need to hypothecate an asset. The loan amount for collateral loans is directly proportional to the market value of the collateral. And the loan amount for unsecured loans is proportional to the creditworthiness of the business owner. So, this makes the collateral-free business loans an ideal option for a small business owner who does not wish to risk his asset to avail a loan for the business.
- Eligibility & Document: The document requirement and eligibility criteria are very basic for unsecured loans are compared to the secured loans. The unsecured loan lenders have set basic eligibility criteria for the business owner who wants to avail a business loan without security. In addition, their document requirement is also limited to a few documents only.
- Processing: The business loans without collateral are processed quickly since there is no collateral involved. And with no collateral, the loan lender is not required to assess the value of the collateral to determine the loan amount to sanction. All the lender has to do is to check the credit score of the borrower and the submitted documents. So, this eliminates most of the tasks involved and makes the processing procedure fast and simple.
- Foreclosure Charges: Most of the loan lenders in India offer you to foreclose your loan account. However, some allow only after paying foreclosure charges. But NBFCs allow pre-paying loans without incurring any penalty or charges. Thus, as and when the business improves financially and the businessman has enough funds to repay the loan, he can repay the loan. This helps in saving a significant amount which otherwise had to be paid as interest. Notably, a collateral-free loan is mostly offered by NBFCs in India.
- Flexibility: When a business loan without security is availed, the business owner is not bound to tell the lender about the end use of the loan amount. The borrower can use the funds for any purpose but the only condition being that it must be related to business. So, with unsecured business loans, the business owner gets the flexibility to use loans for any business-related activity.
- Top-Up Loan: The other important benefit is that a top-up loan can also be availed on an unsecured A top-up loan is availed as an additional loan on the ongoing loan. There is no need to provide any additional documents to avail a top-up loan. However, it will only be sanctioned if the borrower is successfully and timely repaying the loan EMIs.
So, it is clear that availing an unsecured business loan for small business owners is the right option for them. It offers them a good amount of flexibility and numerous other advantages as well over a secured loan. However, the business owner is advised to only borrow the amount that he requires else he will be burdened with extra interest cost.
Summary: To choose between a secured and unsecured business loan is the dilemma faced by every business owner. Both types of loans have advantages and disadvantages. However, unsecured loans are specifically designed to help small business owners to meet their financial requirements. The advantages of availing a business loan without collateral for small business owners over a business loan with collateral are discussed below in the write-up.