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Are Corporate Loans Secured or Unsecured?

Submitted by admin on January 20th, 2025

Business loans are useful for financing different activities in an organization, for growth, or for working capital requirements. In India, businesses can access these loans in two primary forms: extend their products by offering customers two types of loans, namely secured loans and unsecured loans. It is thus important to understand the two to make the right borrowing decision.

Secured Corporate Loans

In a secured loan, the borrower guarantees property, stocks, machinery, accounts receivables, etc. The borrower gives the lender a right to the collateral in situations involving nonpayment of the borrowed asset.

Key Features:

1. Lower Interest Rates: For this reason, the loan is secured meaning that the risk involved for the provider of the loan is low hence low interest rates.
2. Higher Loan Amounts: Firms can borrow more amounts of money since the loan is guaranteed by rich assets.
3. Longer Tenure: It bears the flexibility of repayment tenures, which allow borrowers to use them for long-term projects, like expansion.

Example:

Suppose a manufacturing company in India wanted to introduce a new production line; it seeks a secured loan where the factory premises act as collateral.

• The pledged asset may be sold in case the borrowed amount is not repaid.
• The loan approval time may be longer than the usual time because of the input of the asset valuation and legal requirements.

Drawbacks:

• The borrower risks losing the pledged asset if the loan is not repaid.
• The loan approval process may take longer due to asset valuation and legal verifications.

Unsecured Corporate Loans

An unsecured loan facility does not have the shelter of any property and asset. The approval of the loan depends on the evaluation of the credit status of the borrower and his performance and financial statements of the business.

Key Features:

1. Quick Disbursement: Compared to loans that require an assessment of collateral, unsecured loans take less time to be disbursed.
2. No Asset Risk: Collateral is not needed, and it’s less dangerous for borrowers with couple of resources to their name.
3. Flexible Usage: These loans include those required to be met working capital needs or for covering other operational expenses.

Example:

A start-up in Bengaluru obtaining an unsecured loan to meet marketing expenses and hire new talent.

Drawbacks:

• Higher interest rates due to the lender’s increased risk.
• Limited loan amounts compared to secured loans.
• Stringent eligibility criteria, often requiring a strong credit history and robust cash flows.

Which One Should You Choose?

The choice between secured and unsecured loans depends on your business requirements and financial position.

• For Large Investments: Opt for secured loans if you have valuable assets to pledge and require a substantial loan amount.
• For Immediate Needs: Unsecured loans are better for short-term financing when quick disbursement is crucial.

Conclusion

For tailored advice, consult financial experts or approach banks like SBI, HDFC Bank, or ICICI Bank, which offer competitive corporate loan options in India.

Need more financial advice? Contact DAILY FINSERV today for expert tips on loans and savings!

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