A Secured Business Loan is a loan offered mainly to small businesses against a personal guarantee or by pledging assets like lands, machinery and equipment as collateral. Such loans are secured on the lender’s part as the lending institution can take over the collateral in case the business defaults in repaying the loan amount.
Unlike unsecured loans, the lending institution offers secured loans at a lower interest rate and a higher repayment tenor. And businesses repay the loan in EMIs, including the interest and a part of the loan amount.
Types of Secured Business Loans
Leading institutions provide four types of secured business loans:
- Traditional Term Loans
As the name suggests, traditional term loans follow the conventional method where the borrower borrows a certain amount of money for a fixed interest rate and returns it within a specified time or term.
- SBA Loans
Small businesses are provided loans to expand their operations by the Small Business Administration (SBA) partner lenders. The loan amount is raised by various funding programmes started by SBA for small and medium enterprises.
- Business Lines of Credit
As per business lines of credit, a fixed loan amount is approved, but the lenders charge the interest rate only on the amount withdrawn.
- Self-securing Business Loans
Self-securing business loans do not need any additional collateral. The assets purchased using the loan become collateral for themselves, and hence your existing business or personal assets are not compromised.
Example of Secured Business Loans
- Asset-based financing
- Equipment Finance
- Machinery loan
- Letter of Credit
- Inventory Financing
- Invoice Discounting
- Farm or Dairy loan
Secured Business Loan Eligibility
Secured Business Loans can be availed by meeting the eligibility criteria.
- Applicants must be a citizen of India.
- Applicants must be of age between 21 years to 65 years. In a few instances, the age limit can be extended up to 70 years.
- Applicants must have a total of 5 years of business experience.
- The business must have a turnover of INR 40 lakh annually.
- The business must have a Minimum Annual Income (MAI) of INR 1.5 lakh.
- The firm must be a sole proprietorship, limited liability company or a partnership firm.
Who Can Apply for Secured Business Loans?
- Self-employed professionals
- Schools and Colleges
- Micro and Small Manufacturing Enterprises
- Micro and Small Service Enterprises
- Agriculture, Dairy and Poultry Farmers
Documents Required to Apply for Secured Business Loan
Listed below are the documents required to apply for a secured business loan.
- Application form
- KYC documents: Passport, PAN card, Aadhar card, Voter’s ID, Driving Licence, Electricity bills, Telephone bills or Water bills, etc.
- Business address proof: Property documents
- Income proof: Balance sheet, ITR, and profit and loss statement for the previous two years, and bank statement for the last six months
- Trade licence
- Business establishment proof
- Sales tax certificate
- Memorandum of Articles (MoA) & Articles of Association (AoA)
- Partnership deed
Secured Business Loan Features and Benefits
Mentioned below are the benefits of secured business loans.
- No restriction on the purpose for which the loan is borrowed
- Available against a wide range of collateral
- Loan amount starting from INR 2 lakh
- Lower rate of interest
- Loan repayment tenure of a maximum of 15 years
- Provides tax benefits
Limitations of Secured Business Loans
Some of the disadvantages of secured business loans are mentioned below.
- Takes a longer time to process
- Lender charges fees to process secured business loans.
- Higher risk of losing the collateral if repayment of the loan amount is not paid.
- You must have an established business.
- Your business must be in profit.
Fees and Charges Involved in Secured Business Loan
Following are the fees charged by the lenders for processing secured business loans.
- Loan processing charges
- Pre-payment charges
- Additional charges for documentation, certification, stamp duty, amortisation charges, etc.
Difference Between Secured and Unsecured Business Loans
The table below shows the difference between secured and unsecured business loans.
|Basis for Comparison||Secured Loans||Unsecured Loans|
|Tax benefits||Available||Not available|
Secured business loans were introduced to help small businesses by providing them financial assistance. With no restrictions on the usage of the loan amount, it offers businesses the freedom to make use of the funds in the best possible way. So, if you are a small business in need of credit, do consider secured business loans.
Frequently Asked Questions
Almost all the banks and NBFCs in India provide secured business loans. Here is a list of a few lending institutions.
-State Bank of India
-IDFC First Bank
Business loans are both secured and unsecured, depending on the nature of the loan.
Yes, a business can get a secured loan as part of the secure business loans.