Difference between Secured and Unsecured Business Loan

Definition of Secured and Unsecured Business Loan:

Secured Business Loan: It is one of the most common types of Business Loan as it is backed up by the personal assets or the business assets like real estate etc. In case where the borrower gets in default for non-payment of the loan amount, the lender can assume their ownership over the property. The lender can sell the property to recover the loan amount or losses. The following types of collateral can be presented for obtaining a Secured Business Loan-

  • Real Estate
  • Inventory
  • Personal Cash
  • Equipment
  • Unpaid Invoices

Secured Business Loan

If a business owner wants to limit the personal risk while making investments, they can always avail this type of Business Loan.

Unsecured Business Loan: For this type of Business Loan the borrower is not required to provide any type of collateral to receive funds. It is a viable option for those business owners who have a strong personal credit score. Unsecured Business Loan, however, posts bigger threat and risks for the lenders as in case of default by the borrower, they do not have any asset to sell or seize. Being a collateral free loan, its qualification conditions and standards are stringent. It requires the borrower to have higher credit score, percentage of the credit card transactions and the interest rates are high too.

In case default in repayment of the loan, the bank or the lender takes a legal action against the borrower. They can even engage a collection agency after the borrower or even can sell their outstanding debts to a third-party.

Pros of Secured and Unsecured Business Loan:

Pros of Secured Loan:

  • Banks typically lend the Secured Business Loan to those businesses that have assured investments.
  • If the owner wants to get a bigger amount that they are not planning to pay off quickly, then secured loans is the option they can go for. As this allows them to pay the amount over time.
  • The term of such loan can go up to 30 years.
  • It provides less risk for the lender.
  • There is always leeway in case the weekly or monthly payments are missed or submitted after the timeline.

Pros of Unsecured Loan:

  • These are not bound by the asset’s value that underlies in the transaction.
  • Since there is no collateral involved, the borrower gets the loan amount sooner bypassing the lengthy process of appraisal.
  • When the business of the borrower declares and files for bankruptcy, such loans are usually forgiven by the lenders.

Cons of Secured and Unsecured Business Loan:

Cons of Secured business are:

  • The amount of loan is limited by the asset’s fair value, which is being pledged as collateral by the borrower.
  • Taking a Secured Business Loans gives the lender a legal authority over the asset, which they can use at the time of default in repayments.
  • The lender can seize the asset or the property without a legal court order.

Cons of Unsecured Loans:

  • It more expensive than the Secured Business Loan.
  • The repayment period for such business loans are shorter.
  • These are harder to qualify for.

Differences between Secured and Unsecured Business Loan:

Secured Business Loan is the only available option for businesses that are new or for new entrepreneurs. Whereas for already settled business firms and owners that can pay higher rate of interest, unsecured business loan provides much more flexibility and also provides with larger and faster cash amounts. It is up to their personal choices which type of business loan they want to avail either the Secured Business Loan or the Unsecured Business Loan.

Author: Anil Agrawal
EZYBIZ India Consulting LLP, New Delhi. The firm is business and tax consultancy firm providing consultancy in Taxation, Regulatory, Transfer pricing, Valuation, Corporate funding and Business set up matters. He may be reached at 9899217778 or anil@ezybizindia.in.