Achieving growth is a dream for every business, more so if it is a small or medium enterprise. Who doesn’t like expanding their production and also the revenue of their business? While business expansion is necessary, one thing which is primarily required for business growth is finance (with acumen being the second important ingredient). How does one secure business finance?
Banks and financial institutions provide the solution – business loans.
Business loans are the perfect solutions to financing which enables business growth. Banks and financial institutions lend the much-required business finance in India to business enterprises. This finance comes in two variants – secured loans and unsecured loans. Do you know what they are and how they are different?
Secured business loans
Secured business loans are also called asset-backed loans. These loans are granted on the value of an asset which is pledged as collateral for the loan. These loans are risk-free from the lender’s perspective as in the case of default by the borrower, the asset which is pledged is possessed by the bank to fulfill the loan liability.
Unsecured business loans
Unsecured loans, on the contrary, do not require any collateral or security. The loan is granted on the repayment capacity of the business which is indicated by the enterprise’s creditworthiness. These loans are granted as short-term loans which also have short repayment tenure.
Difference between the two
Both secured and unsecured business loans are fundamentally different and their differences are as follows:
|Secured Loans||Unsecured Loans|
|They require a security against the value of the loan||These loans are granted without the requirement of any collateral|
|The interest rate is low||Interest rate is high|
|The amount of loan depends on the value of the asset pledged for the loan||The amount of loan depends on the repayment capacity and creditworthiness of the enterprise|
Do unsecured loans help in business growth?
Unsecured loans are very easily available and do not require any collateral. They thus have various advantages which make them an ideal solution for quick financing. But do such loans also enable business growth? Let’s find out:
No asset backing required
Secured loans are limiting in the sense that they require business assets to be pledged as collateral. Unsecured loans are easily available and they do not require any business assets to be secured. As such these loans are not restricting. If your business is small and does not have many assets, it becomes a problem to avail a secured loan. This hinders the growth of business. Unsecured loans, on the other hand, can be availed without any assets.
The quantum of loan is not limited
Suppose you require a loan worth Rs.50 lakhs but the value of assets which are to be pledged is limited to Rs.40 lakhs. Would you be able to acquire the desired loan? Secured loans allow loans limited to the value of the asset pledged. Even in this case, the total value of asset is not allowed as loan as a margin is retained by the lender. So, if you have an asset worth Rs.20 lakhs and want a loan of Rs.20 lakhs, you would be able to avail only 80% to 90% of the value of your asset (Rs.20 lakhs in this case) as loan (i.e. Rs.16 lakhs or Rs.18 lakhs). In case of unsecured loans, the loan is granted on the business potential and creditworthiness and not limited by the value of any asset. Thus, businesses can avail an unsecured loan as per their requirement for aiding growth.
Unsecured loans are easily available as the funds are sanctioned within days of the loan application being done. As such, these loans provide the necessary funding to businesses in a short span of time which can be used to increase business profitability and boost business growth. These loans come in handy when the business is poised to grow following a surge in demand. As the loan is easily available, high demand can be met by increasing production. High demand yields better revenue for the business and enables it to grow.
Ideal for young businesses
Businesses which are still in their nascent stage require funding to expand and grow. This funding can be easily secured through an unsecured loan as it does not require any collateral, which is hard to source for budding businesses. Thus, the growth of these young enterprises is dependent on unsecured business loans.
Unsecured business loans, therefore, play an important part in the growth of businesses. Though long term secured loans are essential for long-term finance, short-term unsecured loans help businesses meet their more immediate requirements, which has a direct bearing on their growth.
NBFCs offer unsecured business loans which are also called as business installment loans or term finance. This loan offers the following benefits to businesses:
1. A loan of Rs.1 lakh to Rs.1 crore can be availed by businesses for any of their requirements.
2. There are no hidden or additional charges under the loan. Applicants are required to pay only a small processing fee of 2% of the loan amount borrowed. Apart from this there are no foreclosure or part-prepayment charges incurred on the loan.
3. Certain NBFCs use customized credit criteria while underwriting customers. The credit offering is tailored as per the applicant’s requirement.
4. The loan is sanctioned within 3 days of successful application thus providing the funds at the earliest.
5. No collateral security is required for the loan.
6. Application for the loan can be done quickly through the online medium which reduces unnecessary hassles.
Unsecured loans sometimes prove to be that important source of funding without which businesses couldn’t have grown and achieved enhanced profitability. If you are also looking for a business loan for your business growth avail an unsecured loan today!