Secured Vs Unsecured Business Loans: The Difference and How it Matters for SMEs

To sustain their business growth, small and medium enterprises (SMEs) sometimes need additional working capital, and the most direct way of getting it is to apply for a loan.

With business loans coming from banks, non-banking finance companies (NBFCs) and private money lenders, SMEs have multiple sources to get funding for their operations and expansion. However, these credit options have their pros and cons and should be understood to choose the most helpful alternative.

Secured vs Unsecured Business Loan

Most companies are familiar with the idea of a secured business loan that requires them to offer the lender some collateral as a security against the funding provided. The credit here is issued when the borrower hypothecates a financial asset to the lender. The hypothecation ends only when the entire principal, together with interest and any other associated charges, is fully paid off.

Banks and most other conventional sources of finance are more willing to offer secured loans because from the lender’s point of view, these carry less risk than unsecured funding.

The main advantage for a borrower taking a secured business loan is that the interest on such credit is lower since a guarantee of their asset backs the loan.

Conversely, the challenge is that lenders, particularly banks, accept only selective assets as collateral. They need to ascertain that such an asset can be liquidated in minimum time in case the lender defaults on payment. Due to this condition, many SMEs find it difficult to get secured loans. They may not have assets that are considered as relevant or sufficiently valuable by the lender.

An unsecured business loan, on the other hand, is granted without any collateral. A non-banking finance company with a digital lending model offers such loans based on the creditworthiness of borrowers. If a business has a successful operational history of at least one year, and there are no blots on its previous credit history, it is eligible to get its unsecured business loan from a digitally operating NBFC, also known as a FinTech company.

For an enterprise that has no collateral for business loans, it is natural to opt for an unsecured loan even though the interest charged on this is slightly higher than on secured loans. However, some FinTech companies have created additional benefits with their policies that make unsecured business loan better than secured loans on multiple fronts.

While looking at secured vs unsecured business loan, these are some of the advantages that make the latter more valuable for start-ups and SMEs:

  • An unsecured business loan is available for short terms – borrowers can take a working capital loan for a tenure of less than one year and thus avoid the burden of debt on long term.
  • A FinTech lending company usually has a fully digital application process for its unsecured loans – it takes less than 10 minutes to complete the application and the documents to verify the information therein can also be uploaded online.
  • The time taken to receive funds from a FinTech in the business bank account is less than a week – the application is usually reviewed on the same day when it is submitted, and, if approved, the sum is disbursed in the next 2-3 business days.
  • A loan processing fee of up to 2% and the interest rate are usually the only charges on a FinTech company’s unsecured business loan – the borrowers do not have to pay any documentation fee, loan insurance premium, legal fee and other hidden charges.
  • The repayment options are more flexible for unsecured loans issued by FinTechs – the borrowers can pay off the loan sooner than the predetermined schedule, and maybe charged a nominal pre-closure charge for making the payment.

For an SME that does not have financial assets to hypothecate and needs faster access to cash, will find unsecured business loan better than secured funding.

Here is a summarised view of the features for Secured Vs Unsecured Business Loan:

Secured Business loans from Institutional lenders Unsecured business loans from FinTech companies
Collateral required Backed by a financial asset for collateral No collateral / Security
Advertised interest rate (annual) Between 12% and 24% Between 18% and 24%
Loan processing fee >= 2% <= 2%
Extra charges May have extra charges for documentation, loan insurance and other statutory requirements No extra or hidden charges
Time to get funds into account 1 to 6 weeks 72 hours
Loan application process Digital and paper-based, document-intensive loan application Fully digitalised loan application and document submission
Repayment of loan Only through EMIs Flexible repayment options

Capital Float is a leading FinTech company that asks for no collateral for business loans. We have customised our loans for a variety of business purposes and working capital needs. Our short-term unsecured business loans are issued purely on the creditworthiness of the borrowers and the potential of an organisation to pay back in time. We evaluate every loan application within minutes of its submission to provide the decision on the same day.

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If you have an attractive business opportunity to capitalise upon, do not put off your plans. Talk to a representative in our customer service team at 1860 419 0999 and avail yourself of the benefits of a loan without collateral.

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6 things school owners must know before taking a School loan

Lack of adequate finance should not be a constraint when it concerns improving or a running education institution. There are several options in the financial market for school loans that can be procured to upgrade campus infrastructure, buy new equipment for your labs/classrooms, add new facilities for students and staff or any other productive purpose.

How to get loan for school” is no more a concern for prospective borrowers. The availability of multiple alternatives, however, makes it necessary for the borrowers to be aware of certain factors before they settle upon a particular source of funds. Let us look into six of these.

1. Does the loan require collateral?

Loans for private schools may be secured or unsecured. Many banks still ask borrowers for collateral to be pledged as security. While the low interest rate of such school loans may be alluring, the idea of hypothecating a valuable asset to the lender feels distressing. Fortunately, schools that cannot afford secured loans can get collateral-free finance from digitally enabled NBFCs, also known as FinTech companies. A FinTech lender usually does not require collateral, and issues loans based on the borrowers’ creditworthiness.

2. Is there a limit on the minimum loan amount to be taken?

Inflation rates warrant that nothing worth investing is cheap. However, why take a big loan that will entail much interest? FinTech companies keep an adequate range on the issuable loan amount to accommodate the needs of all institutions that want to apply for school loans. There are no rules requiring schools to apply for a large ‘minimum’ amount if they need merely 5-10 lakhs for the planned purpose.

3. What will be the tenure of the loan?

No institution would like to be debt-ridden for long. Payment of total interest is also high on long-term school loans. This is why it is advisable to check the tenure before accepting the funding from any lender. A FinTech company can be very accommodating and can provide a loan that can be paid back in only one year. A loan for educational institutions may also be stretched to three years.

4. What is the interest rate, processing fee and other charges on the loan?

While taking loans for private schools in India, check the interest rate and additional charges upfront. Banks and traditional NBFCs often have low interest, but their processing fee, documentation charges, legal fee, commission and a bunch of other charges may add up to a significant amount. At times, this is also necessary to cover their paper-centric loan approval process. Conversely, FinTechs that have a succinct digital application process charge a processing fee of up to 2.5%.

5. Are there any pre-closure charges?

Whether you are applying for a loan for construction of school building or to buy new equipment for teaching, your earnings may make it possible to pay off the outstanding balance earlier than its tenure. Such an eventuality is usually met with pre-closure penalties. It is advisable to check the rate of this fee before paying off a lump sum. As compared to banks, most FinTech companies have no or low prepayment charges on their loans.

6. How will the loan be repaid?

Along with the repayment charge, it is also good to check the repayment options for school loans. EMIs are the only way to pay off the debts availed from a majority of the traditional lenders. In comparison, FinTechs have flexible repayment options that can be adjusted as per the borrower’s preferences.

Capital Float is a leading FinTech lender for educational institutions in India. Visit https://www.capitalfloat.com/school-finance to know more about our school loans.

Oct 24, 2018

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Budget 2017: Giving SMEs a stronger footing

SMEs play a crucial role in the economic development of India. They contribute to 45% of the industrial output, 40% of the exports and 42% of the employment in the country. Although these enterprises are highly significant to the economy, they are regularly challenged by policies, laws and processes In recognition of this, the Union Budget 2017 gave start-ups and SMEs a lot to cheer about.

Increasing Financial Viability with a Lower Tax Burden

Finance Minister Arun Jaitley announced a reduction in corporate tax from 30% to 25% for SMEs with an annual turnover of less than ₹50 crores. Moreover, the presumptive tax rate for SMEs with an annual turnover of up to ₹2 crores has been lowered from 8% to 6%. Both these measures would increase the bottom-line of SMEs. These enterprises work on low profits, and their survival is often threatened by even minor fluctuations in the business. The enhanced financial viability would increase the survival rate of SMEs.

At the same time, Budget 2017 has tried to align with the broader objective of increased digitalization. The proposed reduction in presumptive tax is applicable only for a firm’s gross receipts that are received via digital transactions. Also, no cash transaction above ₹3 lakhs would be permitted going forward. Both these measures have been designed to increase transparency and widen the tax base through digitalization.

Much Needed Breaks

Start-ups need maximum support during their initial years. From the next fiscal year, start-ups would have to pay taxes for only three out of seven years, up from last year’s exemption limit of five years, if they recorded profits. This is a great opportunity for start-ups and the economy. While a huge percentage of start-ups fail, these enterprises are responsible for introducing the most innovative products and services. The tax break announced by the Finance Minister would give start-ups a better fighting chance of survival and encourage more innovative ideas to be executed well.

Loans, Financing & Funding

The Finance Minister doubled the lending target to ₹2.44 lakh crores for the next fiscal year, making more credit available to small businesses to finance their working capital needs. Prime Minister Narendra Modi had already announced, on December 31, an increase in government credit guarantees for SMEs from ₹1 crore to ₹2 crores.

The FIPB (Foreign Investment Promotion Board) is to be abolished in the upcoming fiscal year. This would significantly liberalize policy related to FDI (Foreign Direct Investment). This is expected to boost retail and ecommerce in the country. Mr. Jaitley mentioned that further FDI relaxations were under consideration.

Most traditional banks are unwilling to give loans to SMEs due to the fear of defaults. Tax concession on provisions for non-performing assets (NPAs) and capital infusion of ₹10,000 crores for state-owned lenders would make loans more accessible to SMEs.

To encourage more investments into start-ups, the condition of continuous holding of 51% voting rights has been relaxed for carrying forward of losses by start-ups, provided the founder remains invested in the business.

Building on Digital India

While saying the almost 125 lakh people had adopted the BHIM digital payment app, the Finance Minister announced two new schemes – cashback for merchants and referral bonus for individuals.

Aadhaar Pay, the merchant version of the Aadhaar Enabled Payment System (AEPS), is to be launched shortly. This app would enable consumers to make payments without using cards, e-wallets or even mobile phones, since the merchant’s device would be linked to an Aadhaar biometric reader. More than a billion people in India already have Aadhaar cards, and this system would make most financial transactions simple, fast and traceable. It would be a boon for raising loans, enabling fintech lenders to link repayment to payments received by the SME.

The government would be targeting ₹2500 crore digital transactions in FY18 through BHIM, Aadhaar Pay, IMPS and debit cards. The Finance Minister indicated that banks would have to introduce 10 lakh new point-of-sale (PoS) terminals by March and 20 lakh Aadhaar-based PoS terminals by September, allowing more digital transactions, which would enhance financial inclusion and transparency.

Infrastructure

For the upcoming fiscal year, the Finance Minister announced a step-up in the total allocation for infrastructure development to an all-time high of ₹3.96 lakh crores, including increased allocations for railways, road and shipping. Infrastructural development eases a huge bottleneck faced by SMEs in transporting their goods to other regions in a timely and cost-effective manner. Better infrastructure would give confidence to SMEs to expand their markets farther and reduce wastage and spoilage during transportation.

Moreover, the roll out of GST (Goods and Services Tax), which the Finance Minister indicated was tracking as planned, would further increase the ease of doing business in other states.

An allocation of ₹10,000 crores towards the Bharat Net project was announced. This would increase access to high-speed broadband across India, facilitating communication and allowing SMEs to reach out to clients located in various corners of the country in a cost-efficient way. The geographic scale achieved will help SMEs to break physical boundaries and leverage bigger opportunities for growth.

The latest Union Budget comes as a respite for start-ups and SMEs. The strengthening of these businesses would play a critical role in India’s transition to becoming an economic superpower.

Oct 24, 2018

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All You Need to Know about Business Loans for the Service Industry: Must read for SMEs and MSMEs

In the past ten years, India has seen a growth in the number of start-ups coming forward to offer customised solutions in the fields of education, hospitality, travel, transport, healthcare, entertainment, marketing, e-commerce, waste management and consulting. Most of them, however, start with modest funds. They also deal with the challenges of validating their R&D, finding profitable markets and managing office administration costs and overheads.

It is also a common for small and medium enterprises (SMEs) in the service segment to experience their initial expenses being higher than their revenue.

Another problem encountered frequently is that while a business may be prompt at paying the bills raised by its suppliers and utility companies, it may not have customers who pay on time. Even though Accounts Receivable is an asset for any organisation, it gets converted into cash only at a later date. How then should such a business fund its current expenses and keep fuelling its operations? The answer lies in an SME loan, which is the best resort at this point.

Taking an SME or MSME loan is also a wise decision for an enterprise that has planned its next step towards growth or wants to invest some funds immediately in utilising a new business opportunity.

What kinds of loans are available in the market?

The service industry has numerous sub-domains, and a business loan for service company are provided by banks and non-banking finance companies (NBFCs).

The potent ability of digital NBFCs to offer unsecured business loans have made them a competitive source of finance for micro, small and medium enterprises. With a lending model facilitated by digital technology, these companies are also known as FinTechs, and they offer bespoke credit products for organisations providing professional solutions.

Your business loan for service company could be a working capital loan, invoice finance, credit for expanding the business or any other tailored loan for professional services.

A Working capital loan is usually taken to fund the daily operations and cover expenses such as wages, purchase of equipment or to manage entries on accounts payable. These are short-term loans that help businesses to stay focused on their growth.

Similar to a merchant cash advance, invoice finance is another popular SME loan where the lender advances money against the unpaid account receivables of the borrowing business. If you have raised bills to some of your clients, and they are yet to be paid, you can use the same to get a loan from a FinTech company.

Loans can also be used for business expansion and opening new branch offices or shops. Doctors who wish to start more prominent clinics, retailers who want to add more shelves in their shop or to purchase the adjoining premises to expand, and other entities that seek a business loan for service company growth can approach a FinTech lender for quick funds.

Can these NBFCs provide adequate amounts to suit your requirements?

A loan application requires you to state the purpose of the funds. It is good to have a precise idea of the amount to fulfil such business needs, and for this, you should check the exact market costs of the assets that you plan to buy with the borrowed amount.

As an example, if you are taking a working capital loan to buy motorcycles to facilitate the courier delivery services offered by your company, find the price of these vehicles and enter the same amount in your loan application. While there are no rules against requesting a more substantial sum, it is good not to go overboard. This prudence will help you in avoiding higher EMIs.

The amount that you can get on business loan for service company may range from a few lakh rupees to almost a crore. With such a broad scope for funds, the requirements of most SMEs are conveniently met.

How to apply for a business loan: The Process in General

To avail credit from conventional sources, you generally have to visit the lender’s office at least once and discuss the complete procedure. You may be asked to submit multiple photocopies of ID proofs and business financial health documents.

An MSME loan from the digitally operating FinTech company, however, is availed on much easier terms.

While the eligibility criterion differs from loan to loan, it is accommodating enough to include a high number of businesses. FinTechs only need to be sure of the repaying abilities of their borrowers, for which they ask for at least one year of successful operational history.

Owners of any Pvt Ltd, Prop, or LLP (limited liability partnership) company can check their eligibility and apply for their business loan online. They merely need to visit the website of the FinTech lender and fill in the application digitally. Remember that the portal of a genuine lender will be encrypted with a valid security certificate, and the URL will start with an ‘https’ prefix.

Since it is a digitized process, the upload of soft copies of documents is enough to verify the authenticity and eligibility of business for the funds. Among other things, the latest copy of tax returns may also be required.

It does not take long to know the status of your application. You will learn of the lender’s decision in minutes, and for every approved loan application, the amount is disbursed in 2-3 working days. It is deposited directly in the business bank account.

Loan costs and repayment

FinTech loans are offered without hidden overhead charges such as legal fee, loan insurance premium, documentation charge, commitment fee and other miscellaneous dues.

This implies that you only pay interest and a nominal loan processing fee along with the principal in your EMIs. Additionally, the terms of repayment are flexible, and instalments can be varied as per your business earnings.

While availing of a loan to solving cash crunch, SMEs can finance their business strategies without hypothecating any valuable asset to a lender.

Capital Float has adopted a digitally refined lending framework to enable the growing number of SMEs in India to easily procure the funds they need for their ambitious plans. As an online platform offering funds for various business requirements, we have trimmed the formal loan issuing process to make it stress-free and quick for businesses.

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To get more information on loans for specific business types, please visit our website or call us at 1860 419 0999.

 

Oct 24, 2018