Collateral Loans vs. Non-Collateral Loans: A Guide for Filipino Entrepreneurs.

In today's competitive landscape, financing is a crucial step for small and medium enterprises (SMEs) to grow, stay competitive, and succeed while staying relevant in the ever-evolving business landscape.

Whether an entrepreneur is starting a new business, growing operations, or managing cash flow, access to financing is crucial. It can be the key to success and sustainability. One of the most important choices for business owners is picking between secured loans and unsecured loans.

In this article, we’re going to be listing out the differences between a collateral and non-collateral loan and sharing their advantages, disadvantages, as well as a little bit about the application processes for each type of loan.

At Esquire Financing Inc, our goal is to fuel the dreams of entrepreneurs across the Philippines, and understanding the type of loan that is right for you and your business' growth is essential - which is why we hope this article provides added value to you and your team. 

Let's break it down now shall we?

What Are Collateral Loans? 

A collateral loan, requires the borrower to pledge an asset as security. This asset, known as collateral, can include property, vehicles, equipment, or other valuable items.

These loans typically offer lower interest rates, higher borrowing limits, and longer repayment terms, making them a preferred choice for businesses with valuable assets and strong financial stability. The purpose of collateral is to lower the lender's risk and provide a clear guarantee that the borrower will pay back the loan.

There are several types of collateral loans, and one can secure those loans with real estate, such as houses, land, or commercial properties, or other valuable fixed assets. It can also include vehicles and inventory, like business tools and machinery. Lenders also consider bank accounts or financial securities as collateral. 

What Are Some Advantages of Collateral Loans?

Collateral loans offer several advantages, making them a preferred financing option for businesses and individuals seeking substantial funding. Since these loans are backed by assets, lenders see them as less risky. This leads to benefits such as lower interest rates and higher borrowing limits.

The availability of longer repayment periods provides added flexibility, ensuring manageable monthly payments. Additionally, pledging a valuable asset can enhance loan approval chances, even for borrowers with lower credit scores.

The specific assets accepted as a collateral may vary depending on the lender. It is advisable to confirm acceptable assets with your chosen financial institution.

Below are common examples of collateral that one can provide to avail of a collateralized loan:

• Real Estate – Land, residential properties, and commercial buildings.
• Vehicles – Cars, trucks, motorcycles, and heavy machinery.
• Equipment & Machinery – Industrial machines, office equipment, and agricultural tools.
• Inventory – Stocked goods and raw materials used for business operations.
• Investments – Stocks, bonds, and certificates of deposit.
• Receivables – Future payments owed to the business, such as invoices.

What Are Some Disadvantages of Collateral Loans?

Along with advantages, acquiring collateral loans also has some disadvantages. Failure to repay the loan could result in the lender seizing the pledged asset. Collateral loans require a lengthy application process as valuing and checking the collateral can take time to process.

Also, not all small and medium-sized enterprises (SMEs) can offer valuable assets. This limits their access to funds based on their growth stage and financial situation. 

What Are Non-Collateral Loans? 

Non-collateral loans, on the other hand, are unsecured loans that do not require any asset as security. Lenders rely on the borrower’s creditworthiness, business performance, and repayment ability to evaluate loan applications.

This type of business loan is particularly popular among SMEs in the Philippines that lack substantial assets but require fast business loans. They offer fast and simple access to funds, however, they often have higher interest rates and shorter repayment terms. This is because there is more risk for lenders. These financing options are ideal for entrepreneurs who need fast small business loan without risking personal or business assets.

What Are Some Advantages of Non-Collateral Loans?

Non-collateral loans provide a flexible way for small businesses and entrepreneurs to get funding. This option is suitable for those who do not have many assets to use as security. One of the key advantages is the faster approval process, as lenders do not require asset evaluation, enabling businesses to access funds quickly—often within days.

A non-collateral loan can reduce the risk of losing your business or personal assets. This makes it a safer choice for entrepreneurs and enables them to get financial support without risking their property.

These loans are particularly beneficial for startups and SMEs who require small fast business loans to expand their operations. Overall, non-collateral loans serve as the best type of business loans for SMEs with quick, risk-free capital, enabling them to grow, seize new opportunities, and navigate financial challenges effectively.

What Are Some Disadvantages of Non-Collateral Loans?

Some disadvantages may include higher interest rates due to increased financial risks. Since lenders face higher financial risks, unsecured loans usually have lower borrowing limits and strict credit requirements. Additionally, since these loans are easier to obtain, some businesses may take on more debt than they can manage, leading to financial strain or defaults. For instance, a good credit score is essential for loan approval, making it tough for some SMEs to qualify. 

Choosing the Right Loan Type for your Business  

Choosing between a collateral and non-collateral loan depends on your business's financial health, urgency, and risk tolerance. 

Opt for a collateral loan if you have valuable assets, need a larger loan amount, and prefer lower interest rates. This type of loan is great for businesses that need long-term funding. It works well for those who can offer different types of collateral for secured loans without risking their operations.  

Choose a non-collateral loan if you need quick access to funds, lack significant assets, or want to avoid the risk of losing collateral. This is especially helpful for startups or businesses with uncertain cash flow. It allows for flexibility without needing to secure assets. 

Key Considerations When Choosing Between Loan Types 

When choosing the best loan type for your business, and doing a loan comparison, start by looking at loan advantages, and loan disadvantages, following this, there are some important things to consider to achieve your bottom line, before applying for a loan. 

• Consider your financial history and repayment capacity. If you have a strong credit score and consistent revenue, a non-collateral loan may be a viable option despite higher interest rates. If you need a lot of money and can offer security, a collateral loan might be the best long-term option.
• Loan Amount and Borrowing Limit: Collateral loans usually provide higher loan amounts mainly because lenders have security from assets. In contrast, non-collateral loans have lower limits, due to the higher risk that lenders face.
• Interest Rates: Similar to amounts, collateral loans offer lower interest rates due to reduced risk for lenders, and higher interest rates incase of a non-collateral loans since the loan is unsecured.
• Approval Process and Loan Speed: A collateral loan may take longer to process as it needs asset valuation and documentation. A non-collateral loan, on the other hand, has shorter processing times. Funds for non-collateral loans are given within days.
• Associated Risks: In the case of a collateral loans, failure to repay the loan can lead to lender’s assets (e.g., property, vehicles, inventory) being seized. For Non-collateral loans, no assets are at risk, but failure to repay the loan can damage the credit score.
• Credit Score Requirements: Collateral loans may be easier to get approved for, even with a low credit score. This is because the lender has security from the asset. Non-collateral loans need a strong credit history and good financial records.
• Repayment Terms: Collateral Loans enable longer repayment terms, making monthly payments more manageable, and Non-Collateral Loans comes with shorter repayment terms, requiring quicker payback.
• Purpose of the Loan: Collateral loans help with long-term investments, like buying property or expanding a business. Non-collateral loans are better for short-term needs, such as working capital, inventory, or emergency expenses.

Key Takeaways 

Choosing between a collateral loan and a non-collateral loan depends on your business’s unique circumstances. Both loan types have distinct advantages and disadvantages that cater to different needs and financial situations. To check your business's financial health, credit score, and funding needs, you can select a loan option. Look for the one that offers the best mix of benefits and risks. 

Remember, always research lenders and compare loan terms before submitting your loan application. If you would like support with making a decision that is right for your business, please do not hesitate to reach out to Esquire Financing at +63 2 8811 8888 today!