Why MSMEs Prefer Unsecured Business Loans ?
Every micro , small and medium enterprise ( MSME ) requires finance . Whether it is for setting up the enterprise or to meet the working capital requirements of the business , finance is required at every step . Some enterprises manage to fund their business requirements internally . Others look outwards for a loan . Thus , SME loans in India have flourished .
Business loan is a popular avenue to finance one ’ s business . When it comes to business loans , there are various banks which offer the same . There are two types of Business Loans- Secured and Unsecured . Let us understand what these two loans are :
Secured loans Loans against collateral or security are called secured loans . The quantum of loan depends on the value of the security which is pledged to avail the loan . Since the risk of default is minimized , secured loans usually have a lower rate of interest .
Unsecured Loans Loans without any collateral or security are called unsecured loans or collateral free business loan . These loans are granted on the creditworthiness of the owner or on the profit potential of the business . Since no security is pledged , the rate of interest for these loans is comparatively higher . Despite having a higher interest rate , MSMEs always prefer unsecured loans . Do you know why ? It is because unsecured loans have various benefits . Let us find out what these benefits are :
● · Unsecured loans can be easily availed . The process of sanctioning an unsecured loan is easy and simple . The paperwork is minimal . Thus , these loans can be easily availed by businessmen . There are instances which an enterprise faces when funds are required urgently . For example , it can be availed in case of a sudden rise in demand when production has to be increased . Or when an emergency payment is to be made .
● The loan does not require pledging any business asset . The main difference between a secured and an unsecured one is the requirement of a collateral . Businesses have to tie their assets as security to avail a secured loan . This makes the asset prone to repossession by the lender if there is a default in repayment by the borrower . Thus , while availing unsecured loans , businesses have full control and ownership of their assets . Also , small businesses might not have sufficient assets to pledge for a secured loan . In this case , an unsecured loan provides the necessary finance .
● The loan amount is not restricted by the asset ’ s value Secured loans are granted up to 70 % to 85 % of the value of the asset pledged as loan . Thus , if MSMEs do not have high-value assets , they cannot avail the required funding through a secured loan .