A business loan is a crucial and useful asset that helps businesses fulfil their financial requirements. Generally, there are two types of business loans, small loans and big loans. While big loans involve huge amounts and have a longer repayment tenure, small loans are to fulfil short term needs and have a shorter repayment time.
Organisations finance their capital equipment and other essential expenses through this loan. Payroll bills and marketing budgets can also be met with these loans. In the article below we will go over the business loan documents required. A small business loan can be very useful to an organisation but while one is deciding to go for a loan they have the problem of choosing between secured or unsecured loan.
Difference Between Secured & Unsecured Loans:
Secured Loan –
A secured loan is one in which the business will have to offer something as a security against the loan. This usually is a company asset like property, land or can even be equipment. Thus offering an asset or possession means that the loan is secured. The lender will claim these things as their own if the business cannot make repayments.
Unsecured Loan –
An unsecured loan is one where the business does not require to put a security against the loan. Since no property or asset is risked most small businesses go for this small business loan but it has its pros and cons.
Pros & Cons of Small Business Loan:
- No Collateral
As one does not have to pledge any kind of security for getting the loan, it gives you easy access to the funds risking nothing. This is a good move for small businesses and start-ups that don’t have that many assets to put up as collateral.
- Faster Approval
When one opts for a secured loan the lender evaluates the asset and also prepares the business loan documents simultaneously. Since in an unsecured loan, there is no collateral involved the process speeds up exponentially.
- Credit History
Getting unsecured loans is great for improving or building a good credit history. Lenders will check your credit history before issuing you a loan and if you have a good repayment history with an unsecured loan, their confidence increases as they deem you to be responsible enough to make timely instalments of their EMIs.
- Flexible Repayment
Unsecured loans are mostly offered by Non-Bank Financial Companies, as they will take a risk by lending you money. As they the NBFCs realise the plight of businesses, they in most cases offer a repayment plan that suits your business’s financials. They also wave off penalties for late payment, which is a huge advantage over secured loans.
- Credit Score
As there is no collateral one must have a very good credit score. This means that a good repayment history is required for an unsecured loan. Usually, NBFCs will lend money to borrowers who have a credit score of 600 or more.
- Interest rate
As compared to other loans the interest rate of unsecured loans is higher. This is because there is no security or collateral involved whilst procuring the loan. Thus having no surety of timely repayment, the NBFCs use this as a safeguard against fraud. So one can say that collateral-free loans come with high-interest rates. (Checkout Interest Rates Here)
Even though asset papers are not required, other business loan documents are necessary while availing an unsecured loan. The lender will ask for several documents to ensure and check the identity and eligibility of the owners. Most of the time these documents are house and office address, PAN card, GST statements and bank statements.
Although having pros and cons small business loan is beneficial if you want to grow your business and have not proper fund. But analyse the cons before applying for it.