Difference Between Secured and Unsecured Business Loans

Every decision you make impacts your business's growth, and choosing the wrong loan can cost more than just money—it can hold back your potential. For startups, business loans often serve as a critical funding source, but selecting the right type is essential for success.

In India, startups typically choose between two main loan options: secured and unsecured loans. Secured loans require collateral, offering benefits like lower interest rates and higher loan amounts. In contrast, unsecured loans don’t need collateral but come with higher interest rates and stricter terms.

Notably, India’s alternative lending sector is projected to grow by 26.3% annually, reaching USD 9.51 billion by 2024, providing businesses with more options to access capital.

In this article, we’ll break down the key differences between secured and unsecured loans, helping you make an informed decision for your startup.

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Secured vs. Unsecured Business Loans: Key Differences 

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What is a Secured Business Loan?

A secured business loan is a type of loan where the borrower pledges an asset as collateral to secure the loan. This collateral can be property, machinery, inventory, or other valuable assets. If the borrower fails to repay the loan, the lender can sell the collateral to recover the loan amount.

Secured loans are usually provided by banks and non-banking financial companies (NBFCs). Since these loans are backed by collateral, lenders face reduced risk, which allows them to offer borrowers more favorable terms, including lower interest rates and higher loan limits.

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What is an Unsecured Business Loan?

An unsecured business loan is a type of loan that doesn't require collateral. Unlike secured loans, where the borrower pledges assets like property or equipment, unsecured loans are based on the borrower’s creditworthiness, financial history, and business performance. 

Since no collateral is involved, the lender faces more risk, leading to higher interest rates and smaller loan amounts.

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Secured vs Unsecured Business Loans: Examples

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Secured Business Loans

Secured loans require collateral to back the loan, reducing the lender’s risk. Common examples include:

• Inventory Financing: Loans secured against a business’s inventory, providing immediate funds to restock or expand operations.
• Secured Term Loans: This financing requires the borrower to provide collateral as a guarantee to the lender.
• Equipment Financing: Loans to purchase machinery or tools, where the equipment itself serves as collateral.

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Unsecured Business Loans

Unsecured loans don’t require collateral, making them more accessible but often with higher interest rates. Examples include:

• Unsecured Term Loans: Fixed loan amount with a set repayment schedule based solely on creditworthiness.
• Business Credit Cards: A revolving line of credit with no collateral, ideal for short-term expenses.
• Lines of Credit: Flexible borrowing with a predetermined limit, requiring no asset backing.
• Invoice Discounting: Financing method where businesses use their unpaid invoices as a basis to borrow funds.
• Revenue-Based Financing (RBF): A financing model where repayment is a percentage of monthly revenue until the loan is repaid. 

If you are looking for a platform to simplify RBF, Recur Club provides tailored solutions for subscription-based or recurring revenue businesses, making it a reliable option for scalable growth.

Both secured and unsecured loans serve specific needs depending on the size, scope, and financial standing of your business. Choose based on your ability to provide collateral, your repayment capability, and the nature of your funding requirement.

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Conclusion

The best choice between secured and unsecured loans depends on your startup's needs and resources. Secured loans offer larger amounts and lower rates but come with the risk of losing assets—unsecured loans, while faster to access, often have higher rates and shorter repayment terms.

However, if you're looking for flexible, non-dilutive funding based on your recurring revenue, Recur Club provides an alternative that doesn’t require collateral and offers faster access to capital. Visit Recur Club to learn more and get started today.