As an aspiring entrepreneur who wants to start a business venture, you need to know about a secured business loan. It can help you provide working capital to manage your business expenses.
You can obtain a secured business loan for your small or established business to avoid financial crunches.
A secured business loan provides a multi-purpose financing option at a low rate, starting from 10.45% p.a. Here, you must pledge an asset as collateral so that the lender is assured that you will repay the loan by the end of the tenure.
The collateral can be assets like property, plots, machinery, equipment, etc. The tenure of the loan can go up to 10 years. Read on to learn more about secured business loans, their features, benefits, eligibility criteria, and more.
To get a business loan, here are some parameters you must meet:
You must be an Indian citizen
You must have a good credit score, preferably above 700
Your age must be between 21 years and 70 years
You need to have a business vintage of at least three years
The business loan is provided to self-employed people
Individuals, Start-up companies, SMEs, MSMEs, Large Enterprises, etc., can apply
Proprietorship Firms, Partnership Firms, LLCs, or Limited Liability Companies can also avail the loan
Remember that the eligibility criteria vary from one lender to another. Hence, checking with the respective lender is ideal before applying for a loan. Usually, by proving collateral for business loan approval, you need to meet only the most basic terms to qualify.
Here is a list of common documents you must submit for a secured business loan. However, note that this list is not exhaustive, and your lender can request additional documents.
Identity Proof: Passport/Driving licence/PAN card/Voter ID/Aadhaar card
Address Proof: Passport/Driving licence/Voter ID/Utility bills/Aadhaar card
Business ownership proof: Registration documents, certificates
Financial documents: Profit and loss statement, balance sheet, ITR filing, Form 16
Balance transfer documents, if applicable
Here are a few types of secured small business loans.
This type of credit lets you borrow credit against your inventory. The lender evaluates the sales value of your products and offers a loan amount based on that value. After this, they fix a repayment schedule.
Once you repay the entire loan, you will get back your inventory, and you can sell them accordingly. However, if you are unable to meet the credit obligations, the lender may sell your inventory to retrieve the loan amount.
In this kind of financing, firms pledge their assets that generate cash flow, which include automobiles or contractual cash flows as collateral to secure credit.
This refers to a type of credit facility in which you use the loan amount to finance all machinery requirements of your business. Whether you need to upgrade, buy or repair equipment, this credit facility helps you manage your requirements.
This is a document that provides a payment guarantee to the seller. A bank issues a Letter of Credit and ensures to make the entire transaction payment within the stipulated time frame. The bank makes such payments on behalf of the buyer.
Invoice Discounting generates cash by pledging a company’s sale invoices as collateral and paying a service charge before the deadline. The lender issues a loan amount based on a specific percentage of trade receivables.
This is an effective type of credit to increase a company’s cash flow.
This credit facility is backed by collateral such as equipment or inventory. Like other types of secured credit, your lender can seize your collateral if you cannot repay your secured business line of credit.
You can get competitive interest rates and repayment terms, as pledging your collateral reduces the lender’s risk.
The primary difference between the two is that in a secured loan, you must pledge collateral for business loans. On the contrary, you do not need to provide collateral for unsecured business loans.
Apart from this difference, here are some other essential pointers to know.
Secured Business Loan
Unsecured Business Loan
Secured loans can be availed by pledging collateral as security
Unsecured loans do not need collateral as security
The business loan interest rate is low and affordable
The unsecured business loan interest rate is comparatively higher
The repayment term of the secured loan is longer and more flexible
The repayment term of the unsecured loan is not as long and flexible as a secured form of credit
You can get a higher loan amount
The loan amount is comparatively lesser than a secured loan
While you are aware of the types and features of secured business loans, compare various loan offers before choosing a lender. Apart from checking eligibility criteria, compare loan processing charges, interest rates and other loan terms to get the best deal.
A secured business loan is a financing option in which you must submit collateral as security against the loan. This loan offers various benefits to small business owners, including quick access to funds to help manage the business’ operational expenses.
To apply for a business loan, you must meet the eligibility criteria and submit some documents upon approval. Note that these requirements may vary with different lenders.
However, the common eligibility criteria include being an Indian citizen within the age of 21 to 70 years, good credit score, sound business experience, etc.
Business loans can be secured or unsecured. In a secured loan, you must provide an asset or collateral, such as a plot, property, equipment, vehicle, etc., to get the loan.
On the contrary, you do not need to pledge collateral in an unsecured loan. However, you get a loan at a higher interest rate with a shorter repayment tenure when you opt for an unsecured loan.
The secured business loan interest rate varies across different banks and NBFCs. For instance, Bajaj Finserv offers an interest rate of 9% to 30% for secured business loans.
You can provide property, land, plant, machinery, vehicle, equipment, stock, raw material, gold, etc., as collateral to avail a secured business loan.
Most banks and NBFCs allow a maximum repayment tenure of 10 years in the case of a secured business loan.
Different lenders offer secured business loans of varying loan amounts. On Bajaj Markets, you can get a maximum loan amount of ₹50 Lakhs.