Introduction: Is a Secured Loan Your Best Bet?
Did you know that 70% of small businesses in India depend on secured loans for their funding? For many entrepreneurs, leveraging property as collateral becomes the key to scaling operations. But is it always the ideal path? Let’s dig deeper.
A secured business loan backed by property offers a lifeline to finance business growth—whether it’s expanding operations, acquiring equipment, or maintaining cash flow. However, like every financial decision, it comes with its own set of benefits and risks. This article will guide you through the pros and cons of such loans to help you make an informed choice.
What is a Secured Business Loan?
The Pros of Secured Business Loans
- Lower Interest Rates:
By offering collateral, you could save 3–4% on interest compared to unsecured loans. - Higher Loan Amounts:
The value of your property can unlock substantial funding, often up to ₹10 crores or more. - Flexible Repayment Terms:
Lenders typically provide longer tenures for secured loans, making EMIs more manageable. - Improved Credibility:
Regular repayment can enhance your credit score, benefiting future borrowing needs. - Access for New Businesses:
Startups or businesses with limited credit histories can still qualify for funding.
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The Cons of Secured Business Loans
- Default cost:
The lender has a right to claim the property given as collateral if and only if the borrower has defaulted. It has been observed with approx. 5% of MSMEs in India. Defaulting could incur penalties, legal fees, and other associated expenses. - Time-Consuming Process:
Unlike unsecured loans, secured loans may more time due to property evaluations and documentation. - Restricted Flexibility:
Once collateral is pledged, it can be used for other financial purposes but generally it requires approval of the lender. - Fluctuating Property Valuation Risks:
Market downturns could impact the value of your collateral, increasing your LTV ratio.
Example: If a property pledged for a ₹1 crore loan drops in value from ₹2 crores to ₹1.5 crores, the LTV ratio rises from 50% to 67%. This may prompt lenders to request additional collateral or partial repayment.
How to Make the Right Decision?
1. Evaluate Your Repayment Capacity:
Before taking a secured business loan, assess your cash flow to ensure you can manage the EMIs without disrupting your business operations. Determine your net income after deducting all expenses and liabilities and set aside a buffer to handle unexpected challenges. Proper financial planning helps minimize the risk of default and keeps your business on track.
Pro Tip: Utilize an EMI calculator to map out your repayment schedule and plan effectively.
Example:
An owner of a textile business, pledged his commercial property for a ₹5 crore loan. With careful planning, he diversified his revenue streams and repaid the loan on time, tripling his revenue within three years.
2. Choose the Right Property:
Not all properties are equally suitable for collateral. Here’s what you should consider:
- Commercial and Industrial Properties: High in demand and often fetch better loan terms. Generally, great for funding manufacturing or logistics needs.
- Residential Properties: Self occupied residential properties usually fetch the highest LTV which means borrowers can get high amounts by pledging their residence as collateral. Rented residential properties are also considered to be a strong collateral.
- Avoid Disputed or Low-Value Properties: They can delay approval or lead to unfavourable terms.
3. Understand the Fine Print:
Loan agreements often include hidden details. Be sure to review:
- Foreclosure Clauses: Know when and how the lender can seize your property in case of default.
- Penalty and Prepayment Charges: Understand all fees associated with the loan.
- Interest Rates: Clarify whether the rates are fixed or floating.
Pro Tip: Consult a financial advisor to avoid unpleasant surprises in the agreement.
Conclusion: Is a Secured Loan Right for You?
Need guidance?
Red Fort Capital offers secured business loans tailored to your needs, with transparent terms and competitive rates. Contact us today to grow your business without unnecessary risks.
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About Red Fort Capital
Red Fort Capital is dedicated to empowering Indian MSMEs (Micro, Small, and Medium Enterprises) on their path to business growth through customized business loans. We understand that securing a business loan in India can pose significant challenges, particularly when factors like a less-than-ideal credit score, a relatively short business history, unclear financial records, or variable cash flow come into play.
As a respected Non-Banking Financial Company (NBFC), we take pride in offering a diverse range of secured business loans, spanning from 1 to 10 Crores. What sets us apart is our remarkable ability to disburse funds fast, in just 7 days. Our financial solutions are meticulously designed to cater to a spectrum of needs, including working capital requirements, equipment and machinery purchases, invoice/bill discounting, and last-mile financing, among others.
