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How is unsecured SME loan different from secured SME loans?

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Secured SME loans or unsecured SME loans? As an entrepreneur, how do you choose the right loan for your specific business needs? Let’s understand the difference between the two before you apply for a loan.

A secured business loan for SMEs is a traditional business loan where the lender offers a large sum of money against a collateral or commonly known as ‘security’ like property or gold. If the loan applicant fails to repay the principal and the interest amount, or both, during the fixed tenure, the lender has the right to sell off the collateral. Whereas, an unsecured business loan for SMEs does not require any collateral like property or gold. If you’re getting an unsecured business loan from a fintech company, it is as simple a matter as applying for the loan online and getting the money disbursed in your business bank account in as many as a few hours.

Apart from this fundamental difference, let’s compare both the loans to understand their functionality and utility better.

 

1. The size of loan amount

While a big loan amount needs security and tedious paperwork; a smaller loan amount could do without it, and hence, such an SME loan is granted very fast. Considering an SME’s business needs, they can easily go for a smaller unsecured SME Loan without risking any collateral.

2. Degree of ease

For an SME, obtaining a secured business loan is a long process as the lender requires security. It also involves heavy paperwork and a longer waiting period for loan approvals. On the other hand, collateral-free SME loans do not need heavy paperwork or more time, making the disbursal processes quick and easy.

3. Loan tenure

The bigger the loan amount, the longer the tenure. A secured business loan comes with a longer repayment period and fixed terms. On the contrary, unsecured SME finance offers shorter tenures and flexibility to repay the smaller loan amounts. If required, the loan applicant can also switch to a secured SME loan to avail a bigger loan amount, but one can’t switch from a secured loan to an unsecured one.

4. Loan processing time

Unlike unsecured SME loans, a secured SME loan requires a lot of time as it entails scanning through heavy paperwork and verifying all documents.

Due to zero collateral requirements, unsecured SME loans need less paperwork and time, making it an apt choice to meet financial emergencies.

5. Loan eligibility

As already mentioned, secured SME loan requires a loan applicant to provide the lender with collateral and have a sound loan repayment history, while an Unsecured SME loan does not require any collateral. Exactly why, almost anyone with a favourable credit score can avail an unsecured SME loan with ease.

While secured business loans can solve your bigger financial problems; quick and easy unsecured business loans are always the best way to aid your business when your financial needs are small. They are also the best solution for immediate and unplanned expenses.

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