Difference Between Primary Security and Collateral Security in Business Loan

Getting a Business Loan sometimes involves pledging assets to assure the loan repayment to the lender. The assets can be categorised into two categories, i.e., primary security and collateral security. Understanding the difference between these two categories is important before applying for the loan. In this blog, let’s understand the meaning and the difference between primary and collateral securities. Read on!

What is a Security

Security in lending refers to an asset pledged by you to guarantee repayment to the lender. This acts as safety in case you default on the loan repayment. Lenders use security as risk-management to protect themselves from potential losses.

Securities pledged for loans are generally categorised into primary security and collateral security. Both serve different purposes in the lending process but understanding them is essential when applying for loan.

What is Primary Security

Primary security refers to the main asset that is directly associated with the loan transaction, which is used for securing the financing the lender provides. These assets serve as a primary source of repayment and ensure protection against non-payment, in case you default on loan.

For example, if you are building a house with a loan, the house serves as the primary security to the lender.

What is Collateral Security

Collateral security is the additional security you provide to the lender along with the primary security to secure a loan. This form of security is used when the primary security’s value is not sufficient to cover the loan amount, if you default on the loan.

For example: Imagine you want to purchase machinery to expand business. This machinery will serve as the primary security to the lender. However, the value of the machinery is not sufficient in case you default on the loan, for which you need to offer additional security to cover the cost.  

Difference Between Primary Security and Collateral Security

Understanding the key differences between primary security and collateral security helps borrowers structure their loan agreements effectively. Below is a comparison between the two types of security.

Both forms of security plays a crucial role in loan agreements. While primary security ensures repayment through the funded asset, collateral security further reduces risk by offering additional assets.

Why Do Lenders Require Security

Lender requires security to reduce risk associated with lending. By securing a loan with an asset, the lender can legally claim the asset, which can be used to recover the outstanding balance in case of loan default. This provides assurance to the lender and enhances the overall creditworthiness of the loan.

By evaluating security, lenders determine your creditworthiness, which typically results in:

• Quick loan approvals
• Attractive interest rates
• Higher loan amount
• Favorable repayment terms

It is always advised to assess your security options before applying for loans to enhance approval chances and negotiate better terms.

To Conclude

Understanding the difference between primary and collateral securities is important for businesses seeking loans. Where primary securities serve as the main asset directly associated with the loan transaction, collateral securities provide additional safety to the lender. By understanding these and taking steps to plan your finances strategically, you can ensure seamless loan repayment.

Enable your dreams of expanding your business with the help of Poonawalla Fincorp’s Business Loan with no collateral requirement, high loan amount, attractive interest rate and no end usage restrictions. So, wait no more, take your business to new heights by applying for a Business Loan now!

Frequently Asked Questions

1. Are collateral and security the same?

No, collateral is a pledged asset, whereas security includes collateral and other guarantees.

2. What if the primary security value is not sufficient?

If the primary security value is not sufficient the lender will ask for additional security also known as collateral security.

3. Can I get a ₹50 Lakhs loan without collateral?

Yes, you can get a ₹50 Lakhs loan without collateral if you apply for a loan from Poonawalla Fincorp. The Business Loan offered by Poonawalla Fincorp is unsecured in nature making the application process smooth and hassle-free.