Applying for a business loan is one of the best and most preferred ways of getting a business loan amongst small business owners. It is a safer and faster way to raise funds compared to other money-raising means like borrowing from a friend, crowdfunding or bootstrapping.
Many lenders in India, including banks, private lenders, and NBFCs (non-banking financial companies), offer business loans at competitive interest rates. They offer two types of business loans, i.e., secured and unsecured business loans.
In a secured business loan, the lenders ask you to provide collateral against the amount you borrow. The collateral can be any asset, like a commercial or residential property, a piece of land, etc. The lenders take the asset as a security hence secured business loan is also referred to as a loan against security.
Let us look at the benefits of taking a loan against security for small business owners.
- Quicker processing of the loan
If you need any funds urgently for your business, then getting a loan against security is an excellent option. Since you pledge an asset against the money you borrow, the lenders carry lesser risk, and they process the loan faster.
Also, unlike an unsecured loan, the eligibility requirements for loan against security are not very stringent. The lender will evaluate the market value of the asset you pledge and sanction the loan.
- Affordable interest rate
The interest rate for a loan against security is a few points lower than for unsecured loans. This is because the ‘risk’ factor for lenders is less. A business loan with a low-interest rate makes EMI affordable and repayment easy.
- Flexible repayment terms
Generally, lenders offer secured business loans for a longer tenure. They also give you the flexibility to choose the repayment terms to suit your specific requirements. The longer the repayment period, the smaller the EMI.
This is helpful when your business is at the initial or early developmental stages. During this time, you may want to utilise maximum capital for business growth, and any significant payout can be a hindrance. Smaller EMIs can help you keep your business moving without any significant liabilities.
- Negotiate a better deal
When you have a valuable asset to put up as collateral against the business loan, you would be in a better position to negotiate a winning deal with the lender. You can approach different lenders who are ready to give you the maximum amount against the asset and are offering you the loan at an affordable interest rate.
- Get a loan even with a low credit score
When you apply for a business loan, the lender will consider your credit score as one of the critical factors in determining your eligibility. If your score is less or does not meet the lender’s minimum credit score requirement, they may reject your loan application.
However, when you apply for a loan against security, the lender may be willing to sanction the loan even with a low credit score because the asset you pledge acts as a security for the lender. If you fail to repay the amount, the lender will take over the asset and recover the money.
Thus, getting a loan against security has many benefits for small business owners. You get immediate approval, higher capital and an attractive interest rate. So, if you have any assets, you can leverage them to your advantage and get a business loan to grow your business. As your business grows, you can easily repay the amount and get back your asset.