What is the difference between secured and unsecured loan?

08 Mar 2018

SMEs require regular capital investment to grow the business. For this, there are two types of loans available: secured and unsecured business loan. SMEs must understand the implications of both types of loans before finalizing on  suitable loan type

Here are some quick differences between secured and unsecured business loans are:

  1. Collateral requirement – Unlike secured business loans, unsecured business loans do not require any collateral for approval. This is helpful for early stage SMEs with limited assets struggling to arrange working capital from a trusted lender.
  2. Interest rates – Secured business loans have a lower interest rate. However, unsecured business loans and credit lines offer flexibility around period and usage. Accordingly, SMEs pay interest rates depending on their requirement.Credit lines also offer no prepayment or foreclosure charges. This helps to save unnecessary charges and still have a ready source of capital at all times.
  3. Period of loan – Unsecured business loans are better for short-term needs as they offer a solution while secured business loans are recommended for long-term requirements and bigger investments such as plant set-up, machine purchasing etc.
  4. Risks involved – Secured business loans, if left unpaid, create a risk of seizing your collateral and creating a bad credit history. While unsecured business loans seize no tangible assets but still create a poor credit history. With the growing importance of CIBIL, SMEs must ensure to repay their loans.
  5. Loan approval time – The biggest advantage of unsecured business loans is that they are typically approved quickly by NBFCS. However, secured business loans require heavy documentation and take long for approval.

SMEs should think smartly about their choice of loans. Mostly, SMEs pick their choice of loans based on their stage of growth. Early stage SMEs or smarter SMEs run a combination of secured and unsecured business loans to efficiently manage working capital. Therefore, you must assess both options and make an intelligent choice to save interest as you grow your company. We, at OfBusiness, help SMEs save upto 6% on their bulk material requirements via smart-financing. SMEs avail unsecured credit lines from OfBusiness to finance their bulk purchases and save money to grow their business faster.

Reach out to us at 1800-102-9586 or mail to contact@ofbusiness.com.

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