Both aspiring, as well as well-established entrepreneurs require financial support. Using financial support, they can upscale their business activities. A Secured Business Loan from Muthoot Capital is a viable and economically sound option for all business loan seekers.
Every business owner should be aware of the types of business loans. There are primarily two types, secured business loans and unsecured business loans. One of the primary factors determining whether a business loan is secured or unsecured is the requirement of collateral. However, there are other differences between secured and unsecured business loans. Let us have a detailed understanding of secured and unsecured business loans and the differences between the two.
What is a Secured Business Loan?
Secured business loans are the safest and most popular forms of credit. The assets a business needs to pledge as collateral for a secured business loan are:
- Personal cash
- Inventory
- Equipment
- Land
- Building
- Unpaid invoices
A business owner can get a secured business loan against mortgaged property. They can also provide fixed deposits, government securities, savings accounts, gold, and other precious metals as collateral for the loan.
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What are Unsecured Business Loans
Unsecured business loans are those for which the business owner does not have to provide collateral. Business owners with a strong credit score and balance sheet can consider applying for an unsecured business loan. Unsecured business loans have stringent standards and are only easily available for some businesses. If the borrower fails to repay the unsecured business loan, there will be legal action against him.
Differences Between Secured and Unsecured Business Loans
- Collateral Requirement: The primary difference between a secured and an unsecured business loan is the requirement of collateral. Collateral is the guarantee the borrower gives to the lender against a loan. Secured business loans derive their name from the fact that they are backed by collateral and are guaranteed loans. Business owners may provide an asset, such as land, equipment, inventory, property, etc., as collateral against the loan. Muthoot Secured Business Loan provides the flexibility of longer tenure and relatively lower interest rates to the borrowers.
- Credit Score: Before providing a business loan to a company, the loan provider checks the credit score of the business and the business owners. And based on this, they decide their loan amount and interest rate. However, secured business loans are more lenient with their credit score requirements than unsecured business loans.
- Interest rates on loans: A lower interest rate is charged on secured business loans as the element of risk is lower in this case. On the other hand, lenders charge a higher interest rate on unsecured business loans as they do not have a guarantee of an asset to back the business loan. Along with lower interest rates, borrowers of secured business loans can enjoy additional perks, such as higher loan amounts and longer repayment periods.
- Personal guarantee: Business owners can get these loans by taking personal liability for the loan. For this, they can guarantee their assets against the two wheeler loan. It can be helpful in cases where the business needs more assets to pledge against the loan. A business owner or partner can pledge their land, property, or gold as collateral against the loan. A business owner can pledge his assets as a limited or unlimited liability against the business loan. If the business fails to repay the business loan on time, the lender recovers only the loan amount from the assets of the guarantor.
A business may choose between an unsecured and secured business loan depending on factors like credit score, repayment capacity, the time required to repay the loan, etc. Businesses prefer secured business loans as they are easy to avail, come at lower interest rates, have longer repayment tenures, and fetch a higher loan amount.