What is a Secured Business Loan?

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.

What is a secured business loan?

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.

Types of secured business loans

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:

• A property mortgage is the most common form of secured business loan. The higher the value of the mortgaged property, the longer the repayment tenure.
• The government securities, fixed deposit certificates, and savings accounts.
• Gold and other precious metals.

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.

Features and benefits of secured business loans

• No restriction on the usage of the funds. You are free to use the loan amount for purchasing machinery/equipment, expanding business limits, purchasing office space, paying rent/debts/salaries, purchasing raw materials, and hiring employees.
• Wider loan range, from Rs.10 lakh up to Rs.20 crore.
• Lower interest rates as compared to unsecured loans.
• Loan repayment tenure of up to 15 years.
• Collateral makes it more convenient to avail loans for businesses that could not get unsecured loans.
• Tax benefits can be availed in some instances.

How are secured business loans different from the unsecured ones?

Factors	Secured Loans	Unsecured Loans
Loan amount	Higher	Lower
Interest rate	Lower	Higher
Repayment tenure	Longer	Shorter
Risk involved	Low	High
Credit score	Secondary importance	Primary importance
Tax benefits	Applicable	Not applicable

Who can get secured business loans?

• New and existing customers of banks and non-banking financial institutions (NBFCs)
• Type of firms:
  • Proprietorship firms
  • Limited liability companies
  • Partnership firms
• Age criteria: 21 years up to 65 years, can be extended up to 70 years of age
• Good credit score with a good repayment track record
• Necessary security and good cash flow must be shown with document proof
• The firm must be operational for a minimum of 2 years
• The firm must be in profit for a minimum of 2 years
• Own factory, shop, or residence will be beneficial

Documents required

• PAN card, both the applicant and the company
• Passport-size photos
• Application form
• ID proof, such as passport, voter’s ID, and driving license
• Address proof, such as Aadhaar card, utility bills, passport, and driving license
• Business address proof, such as a copy of property documents
• Income proof, such as company account statement for the last six months, balance sheet, last two years’ ITR, profit and loss statement for the last two years audited by CA
• Trade license
• Establishment/sales tax certificate
• Copy of partnership deed
• Copy of Memorandum of Articles (MoA) & Articles of Association (AoA)

Frequently Asked Questions (FAQs)

How do I know if the collateral is sufficient?

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.

Is it mandatory to provide property as collateral?

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.

Why should I provide collateral?

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.

Will the collateral be immediately sold if I fail to pay an instalment?

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 repayments are not made on time, does the lender take over all the proceedings from the sale of the collateral?

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.