In the past year, business loans have acquired a significant chunk of the SME lending market that totals up to $300 billion. The latest statistics along with others point towards the growing popularity of secured and unsecured or collateral free business loans.
These are not limited to funding for business establishment as new areas of business funding have evolved. Lending institutions are also offering these to entrepreneurs for financing renovation, expansion, meeting working capital needs and more.
Types of business loans
Like most other loans that you can avail from these institutions, a business loan is also available in two varieties.
- Secured business loan
A secured loan is a business funding that a financial institution offers a borrower against any asset. They are also known as business loans with collateral. A borrower can avail these by securing a fixed asset, negotiable securities, bonds and such other personal properties that can be liquidated.
Business loan interest rate is generally low here because of its secured nature. For a secured business credit, the loan to value is higher, which can be anywhere around 70-80% of the asset’s market value. This makes it suitable for extensive business funding.
- Unsecured business loan
Unsecured or collateral free business loans are one that entrepreneurs can avail without pledging any property to the financial institution.
For unsecured business loans, the interest rates are comparatively higher than the secured ones. However, NBFCs like Bajaj Finserv offer unsecured Business Loan of up to Rs. 30 Lakh with fast approval at competitive interest rates.
Situations to apply for a secured business loan
At times, businesses need a large amount of capital financing which falls entirely outside the purview of the unsecured type. It may be to –
- Import machinery of high value
- Fund the growth of scale at which their business operates
- Acquire bigger office space, etc.
An entrepreneur can secure a business loan with collateral for such sizeable investments. A few business areas are expected to boom and hold significant potential ahead. If your business is one of them, opting for a business loan can prove to be of high value.
Proper utilisation of collateral to avail secured business loan
Most people willing to avail a business loan do not go for the secured option in fear of risking personal property.
However, with proper planning, borrowers can correctly utilise their personal property to finance their venture. Business loan eligibility criteria are also relatively simple for this loan. All they need is the right assessment.
- For residential property
When it comes to offering a residential property as collateral, one needs to consider two things. First, mortgaging a residential property will bear the risk of losing the home in case of loan defaults. This may put the safety and security of the entire family at risk. In that case, the borrower must reconsider the collateral.
Secondly, if another residential property is available that remains unused, one can safely utilise it to fund additional business capital.
- For commercial property
As for a property that an entrepreneur is using to run the business, it is the best available option to offer as collateral. It will also ensure that business risk remains in the business itself and does not affect any other aspect of your life.
- Other securable assets
For other assets that you may offer as collateral to secure a business loan like bonds, securities and more, doing so is less risky. Entrepreneurs only need to see their repayment capabilities before applying for the funding.
For other securities mentioned above, they also need to reflect on their capacity to repay.
If you are not convinced to bear this risk, you can always go for NBFCs that offer collateral free business loans.