Secured business loans are the perfect business financing solution for small- or medium-sized businesses. They are often used when a business needs to pay a large purchase or increase its working capital. A firm can use them to get cash when its suppliers are low on stocks or when it has burned through its reserves.
Many people are unaware of the different types of secured business loans out there. It is pretty easy for businesses to get into a financial mess. This article will look at different types of secured business loans, their benefits, and what you must consider when applying for a loan.
What is a Secured Business Loan?
Secured business loans are described as a form of financing. Typically, small companies seek them. These loans are secured with personal guarantees. They can also be secured by offering assets or property as collateral against them. The borrower gives the collateral as a guarantee to the lender for the repayment of the loan.
This also means that the lender can transfer the collateral into custody if the borrower cannot repay the loan.
A secured loan has a longer repayment time than unsecured loans. The interest rate on secured loans is also relatively lower than that of unsecured loans.
Features of a Secured Business Loan
- Collateral RequirementThis is one of the most vital features of a secured business loan. Secured loans are called so because they are secured by way of collateral.The borrower must offer some asset or property to the lender as collateral against the loan. The lender can take custody of this collateral if the borrower cannot repay the loan amount.
- Lower Interest RatesInterest rates are lower on secured business loans as compared to unsecured business loans. Here, the bank has a comparatively higher level of confidence that the borrower will be able to repay the loan.
- Eligibility for Higher Loan AmountThe borrower is eligible to secure a larger loan amount in the case of secured loans. They can secure a loan amount from Rs. 10 lakhs up to Rs. 20 crores, depending on their business requirements.
- Quick ApprovalsSecured business loans are also approved quickly because one pledges some asset or property as collateral against the loan, so the bank feels more confident in offering them a loan.
- No RestrictionsThere is no restriction on the usage of secured business loans. They can be used for a variety of purposes, including:
- Business growth and expansion.
- Equipment purchases.
- Office space or land purchases.
- Rent or salary payments.
- Stock purchases
- Inventory expansion.
- Debt reduction.
- Staff recruitment and training, and more.
- Loan Tenure: The repayment tenure in secured loans is also higher as compared to unsecured business loans. The repayment tenure for secured loans can go up to a maximum of 15 years.
Types of Secured Business Loans
- Secured Term Loan: The most popular form of finance for business is the term loan. The loan can be secured or unsecured in the sense of. The amount of loan available is contingent on the credit history of the company. The term can be for a period of 1-5 years in the case of unsecured loans or 15-20 years for secured business loans. The term loans are used for a specific reason usually for capital expenses. The lender will pay the business the loan amount all at once.
- Equipment/Machinery Finance: Manufacturing businesses frequently select equipment finance or machinery loans. The operation of manufacturing units requires the use of costly machinery. In addition, equipment financing is the option for business loans to fund the purchase of machinery. This is owing to the unique characteristics of machinery loans, which call for the use of both additional security and the relevant equipment as collateral. The interest rates might not be as high as those for term deposits.
- Invoice Discounting: Invoice financing can also be referred to as invoice discounting or factoring. This kind of financing is a great option for small-sized businesses which have a time gap between generating invoices and receiving payment from customers. The institution can provide cash against the amount that is raised on the invoice. The lender can finance up to 80 per cent of the invoice value. When the company receives the money, it pays the debt according to the stipulated tenure and rate.
- Working Capital Loan: These are the kinds of small business loans that are taken to cover the need for cash needed to run an enterprise daily. They provide a balance to the cash flow that is essential for running an enterprise. It is also useful to cover a deficit of cash in times of low demand or meet demand during the high-demand season. The majority of applicants are manufacturers, service providers wholesalers, retailers, and traders involved in exports or imports.
- Loan Against Property for SME: Companies with substantial financial needs may choose to apply for SME loans backed by property. In this situation, the applicant will have to mortgage their property to get the cash they need for business expenses. Residential or commercial property may be utilized as collateral against the loan. Up to 70% of the property’s current market value may be financed by the lender. The title to the property shouldn’t have any liens or other encumbrances. The mortgaged property should also not be the subject of any legal problems.
Before applying for any loan product, you should know your options. Business owners who need working capital consider secured business loans as a viable option. This type of loan is available to business owners who have adequate collateral to back up their loans.
These loans help you to expand your business and also use these funds for improving the profitability of your business. There are many types of business loans available that suits different requirements of your business. To finance your business, it makes sense to consider applying for a secured business loan.
Visit Piramal Finance to know more about loans and methods to obtain loans.