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.