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Similar to the mortgage loans we come across in personal finance, businesses have secured loans. However, the working of secured business loans and personal mortgage loans may differ. The assets and properties each of them consider differ as well. Know more about secured business loans here.
Secured business loans can be understood as a funding instrument commonly sought after by small businesses. This type of loan is secured by a personal guarantee or by pledging assets/property as collateral. The collateral is seen as a way for borrowers to assure the lender that they will repay the loan over the tenure specified in the loan agreement. It also implicitly means that the lender has the right to take the collateral to custody in case they are unable to repay the loan.
Since this is a secured loan, a longer repayment tenure can be expected as compared to an unsecured loan. For the same reason, a slightly lower interest rate will be applicable.
Secured by Collateral
This type of secured business loan includes any of the following to be pledged as collateral and must be owned by the business:
Secured by Personal Guarantee
Secured loans are also provided based on the business owner’s guarantee. In this case, property, land, or gold owned by the proprietor or partner can be considered for a collateral purpose. The property can be pledged as limited or unlimited liability.
|Factors||Secured Loans||Unsecured Loans|
|Credit score||Secondary importance||Primary importance|
|Tax benefits||Applicable||Not applicable|
For the lender to consider property/asset as collateral, the property/asset’s current market value, as assessed by the lender, must be equal to or higher than the business loan you seek.
You need to provide collateral to get a secured business loan. However, you can provide equipment, machinery, stock, raw material, and other things as collateral if not land and property. You must know that different lenders may have varied preferences in this regard.
The primary purpose of using collateral to lend money is to have some sort of assurance that the customer will repay the loan. If a customer fails to repay, the lender will have the right over the pledged asset/property and may sell it to recover the lost money. Since these loans may include vast sums of money, some sort of repayment guarantee is needed.
In case you fail to make repayments on time continuously over a certain period, a protocol will be followed to remind you about the missing payments. If you fail to respond to the reminders, the lender will follow the set protocol of sending you a legal notice. Further, the case may be taken to the court of law or maybe auctioned based on the terms and conditions agreed upon at the time of loan disbursal.
If your property or asset is auctioned due to the failure of repayments, the lender will retain only the amount that you owe towards the loan repayment. In case of an excess received from the proceedings, it will be credited to your bank account.