Every business needs loans in different scenarios, and the presence of multiple lenders gives a business owner many choices. Typically, a small business loan has two categories: secured and unsecured. A secured loan is a loan in exchange for security. Technically, the security has been called collateral, which can be one or multiple valuable assets. The lender will sell the collateral through an auction if the borrower cannot repay the loan.
On the other hand, an unsecured loan does not require collateral. Lenders offer such loans depending on the borrower’s credit history, reputation, yearly revenue, etc. Small enterprises and entrepreneurs can contact banks or other financial institutions to check their eligibility for such loans. In the following section, you will find a detailed comparison between secured and unsecured business loans in Coimbatore.
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How Much Can You Borrow?
Secured and unsecured loans offer different loan amounts depending on multiple factors. For a secured loan, the present market price of the collateral is crucial. You can borrow a high amount if the collateral has a high market price. Typically, lenders offer 60-70% of the present market price of the collateral. In most cases, businesses use properties as collateral. Alternatively, a business owner can use an expensive business asset or production facility as collateral.
On the other hand, unsecured loan amounts depend on a person’s credit history. In the case of a business loan, the business owner’s credit history will come under consideration. A budding entrepreneur often does not have a credit history. In such cases, banks or financial institutions do not offer loans to them. However, they may get a loan if they can show profitable yearly revenue with their business.
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What Are the Eligibility Criteria?
Anyone is eligible to apply for an unsecured loan from banks or financial institutions. However, the eligibility criteria for secured and unsecured business loans differ depending on many factors. You do not need a security deposit for an unsecured loan. But, your credit history is crucial for the lenders. An entrepreneur with a good credit score can quickly get a loan from banks and other financial institutions.
On the other hand, you need an expensive asset to obtain a secured loan. Your loan application’s approval depends on the collateral that you possess. In such cases, banks do not check the borrowers’ credit scores. Therefore, the loan is suitable for business owners who do not have a good credit rating.
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Rate of Interest
Before applying for a small business loan, the applicant should consider the rate of interest associated with a loan. The interest rate depends on your credit score and business revenue in unsecured business loans. A business with an excellent growth history and revenue can easily get an unsecured loan with a low-interest rate. Nevertheless, such loans come with flexible repayment schedules that borrowers can choose according to their convenience.
A secured business loan typically comes with a low rate of interest. Since the loan is offered against collateral, lenders have peace of mind. Therefore, they often provide such loans with a low rate of interest. However, you may not find much flexibility in the repayment schedule. With aging, the price of collateral may reduce. Therefore, lenders want to ensure that they get their money back in the shortest possible time.
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Finding the Suitable Lender
Finding a suitable lender is essential in both secured and unsecured loans. You must first approach the banks for an unsecured business loan in Coimbatore. All public and private sector banks offer unsecured loans to business owners or entrepreneurs. So, you can fill up an application and check your borrowing eligibility. Besides applying for the loans under the bank’s scheme, you can apply for a loan under the state or central government schemes. Business owners can approach many financial institutions if the bank rejects the loan application.
A few banks and financial institutions offer secured loans. You will not find such lending options in all banks. Nevertheless, you will also notice the limited availability of such non-banking private lenders. Many private lenders do not offer a high loan amount and may charge a high-interest rate. Moreover, borrowers should check the lender’s reputation before applying for such loans.
Conclusion
Both secured and unsecured loans have their pros and cons, and thus borrowers must apply for a loan after understanding their financial requirements and capabilities. You should not choose a loan amount that will be difficult for you to repay. Moreover, you must use the loan calculators to check the loan tenure and monthly payable installments. Some loans come with hidden charges. You must ensure that you do not pay any hidden charges. Reading the terms and conditions before applying for a loan will help you avoid hidden charges.
So, these are the things that you should know about a small business loan. Comparing secured and unsecured loans may have cleared many of your doubts.
