SMEs may encounter financial challenges along the way, many of them unexpected. And unlike larger enterprises, they often lack the accumulation of large financial reserves to weather uncertainties. As such, SME business loans become a viable source of financing to help bridge gaps in operational costs, fund growth initiatives or meet any other business needs.
SME business loans can take on several forms, but generally, have predetermined loan terms and conditions, including tenor, monthly repayments, interest rates and loan amount. For the most part, you can break them largely down to secured and unsecured loans.
A secured loan is a loan that is guaranteed by a collateral, which is any type of asset that is of similar or higher value than the loan that is being disbursed to a borrower. Some examples of collateral include vehicles, property, jewellery, and company shares.
Property is the most common type of collateral. Lenders typically prefer property for collateral because its value appreciates consistently. If you pledge a collateral that depreciates over time, such as a vehicle, the lenders will appraise its value at the end of the loan tenor, rather than at the time of its purchase. Borrowers can pledge more than one collateral to decrease risk and obtain the quantum of financing they desire.
Should the borrower default on the loan, their collateral will be claimed by the lender and sold as payment for the borrower’s debt.
An unsecured loan is one that does not involve any collateral. Instead, lenders evaluate a borrower by their income, credit score, responsibility as a borrower, credit history and more. Unsecured loans are considered riskier for lenders, and therefore their repayment terms and conditions tend to be stricter and more stringent compared to secured loans.
Both types of loans have their own advantages, and they cater to businesses facing different needs and financial capabilities. We shall look at what sets one type of loan apart from the other in terms of the benefits they offer you and your business.
Both secured and unsecured loans offer unique advantages, depending on your specific business needs.
Secured loans offer higher quantums and are suitable for companies who can afford longer repayments, and have the asset(s) to guarantee this loan. Secured loans are also a viable option for businesses that may not have adequate creditworthiness, but still have some valuable properties that they can use as collateral.
Unsecured SME business loans, on the other hand, are more suited for companies that require lower quantum, short term financing. For instance, to finance emergencies and unplanned circumstances and to bridge administrative costs.
Choosing between secured and unsecured loans should be simpler, now that you have more information about both types of business loans. Depending on your needs, risk appetite and available assets, one may prove more suitable than the other.
At Lendingpot, we provide access to multiple lenders including banks and private lending institutions. It takes less than 5 minutes to register and begin receiving loan offers from our partners. You can compare and contrast the different options to determine the best fit for your needs. Apply Now.
Lina heads up all things marketing and branding at Lendingpot. With a keen aesthetic eye, she believes in the use of design to communicate with our SME community and aspires to turn Lendingpot into a household name. Out of work, she is an avid camper and appreciator of nature’s best works.
