Among various commercial lending options, secured business loans are a vital source of capital. Proprietorship, partnership, and limited liability companies with sound creditworthiness can apply for a secured business loan. While acquiring a secured business loan is the best way to finance a new business venture or expand an existing business, one should analyse the pros and cons of these loans before applying for one.
Here is a quick guide post to define what business owners should know – the pros and cons of secured business loans – to decide if it is the right choice for your business.
Pros of Secured Business Loans
1. Beneficial for Businesses with Limited Track Record
Credit score for new businesses is relatively low due to associated high risks. This presents challenges for them to receive a business loan. Secured business loans, like Muthoot loans, can help startups and small businesses with a short track record and low asset base. A business with profitable operations for at least the immediately preceding two financial years (as per audited financial statements) and no accumulated losses can apply for this loan.
2. Low-interest Rates
Secured business loans allow the mitigation of associated risks with lending. Since the loan is secured with collateral, lenders consider it less risky lending than an unsecured loan and can offer low-interest rates. However, other factors, like the borrower’s creditworthiness and collateral value affect the interest rates. Lenders decide the rate based on the due diligence of individual businesses.
3. High Loan Amounts
Secured business loan amounts are significantly high as lenders sanction these loans based on the collateral provided. The lender evaluates the collateral value and determines the maximum loan amount for the business. Businesses can utilise high-value Muthoot loans for various purposes, including business expansion, new equipment purchases, consolidating debt, and staff hiring.
4. Unlocks the Value of Company or Personal Assets
Reputed lenders allow businesses to secure a business loan using various assets. They enable entrepreneurs to unlock the company or personal assets’ value and access the required capital.
- It can be a secured loan against property, equipment, machinery, government securities, fixed deposits, savings accounts, or other valuable business assets.
- Small businesses can get secured loans with the business owner’s guarantee also. The proprietor or business partner can use valuables like their property, land, gold or other precious metals for a personal guarantee.
5. Long Repayment Periods
Secured business loan tenure is typically longer than that of an unsecured loan. The tenure varies with different lenders and can be ten or more years long. Longer repayment tenure of Muthoot loans enables the business owner to spread out loan instalments over a long period, making borrowing more affordable. It is more beneficial for businesses in their growth phase and inconsistent cash flow.
Cons of Secured Business Loans
1. Potential Risk on Asset
Lenders can offer secured loans against varied valuable assets to businesses with low credit scores or limited track records. But, it presents a repayment risk to the borrower. If the borrower cannot keep up with repayments, it can be problematic as the lender can seize or even sell the collateral asset.
2. Requirement of an Acceptable Asset
It is a downside of secured business loans that lenders may have a list of specific assets acceptable as collateral. However, most of the acceptable assets are valuables a company can hold and collateralise.
Secured business loans with long-term tenure and low interest rate can be an ideal option for businesses that may not be immediately profitable or in their growth phase. At the same time, being aware of the potential risk of losing the pledged asset is necessary. Based on financial standing, potential revenue, cash flows and ability to pay off the secured business loans, businesses can decide on secured business loan viability.