Expanding an existing business or purchasing materials often requires significant capital. But what happens when you need funds and don’t have assets to offer as collateral? This is where unsecured business loans can help. They allow you to secure the necessary finances without risking your assets.
So what exactly are unsecured business loans, and how can businesses benefit from them?
What is an Unsecured Business Loan?
An unsecured business loan is the money you borrow from a lender for business purposes without pledging security. The lender assesses your repayment capabilities, i.e., your credit history and income, to approve such a loan. You can use this loan to expand your business, upgrade machinery, fund working capital, renovate the business space, and more.
How do Unsecured Business Loans Work?
Unsecured business loans are similar to other business loans – you apply, wait for the lender’s decision, and once the loan is approved, you repay it over time.
Without collateral, lenders are more selective, particularly for loans with lower interest rates. The lenders usually evaluate the borrower’s credit profile and how well their business is doing.
Types of Unsecured Business Loans
Below are the types of unsecured business loans:
Term Loan
An unsecured term loan must be repaid over a specified period through fixed monthly installments (EMIs).
Working Capital Loan
A working capital loan covers a business’s daily operational expenses and is granted based on the applicant’s creditworthiness and repayment ability.
Overdraft
An overdraft is a credit facility provided by the lender that allows the borrower to withdraw funds up to a certain limit. Moreover, the interest is only charged on the amount utilized from the approved credit limit.
Loans under Government Schemes
Various government-initiated loan schemes offer small business owners access to loans at lower interest rates. These include schemes such as Mudra Loan (PMMY), Stand-up India, Start-up Scheme, Prime Minister Employment Generation Program (PMEGP), Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), and more.
Merchant Cash Advance
This type of business loan is based on the advance credit sales deposited into a merchant’s account. The loan amount is determined by the business’s monthly credit card transactions or the business’s monthly volume.
Micro Loans
Micro loans, which are usually offered by Microfinance Institutions, help meet immediate financial needs. The loan amounts usually depend on business requirements.
Business Credit Cards
Entrepreneurs can avail loans through their business credit cards. The loan amount depends on the credit line approved by the lender and helps cover the business’s working capital needs.
Benefits of Unsecured Business Loans
Here are some of the benefits of unsecured business loans:
- The primary advantage of an unsecured business loan is that it does not require you to pledge collateral to obtain funds.
- Unlike secured loans, which require the bank to evaluate the value of collateral, unsecured loans skip this step, making the process quicker.
- An unsecured business loan can provide quick funding in case of an unexpected business emergency. You can ensure your business continues running smoothly without financial interruptions.
- With strong repayment capabilities, you can negotiate lower interest rates, reducing your overall loan cost. This makes your monthly repayments more manageable, ensuring they don’t take up a significant portion of your income.
Conclusion
Unsecured business loans offer a flexible and accessible financing solution for entrepreneurs and small business owners looking to grow their enterprises without the burden of collateral. With faster processing times, manageable EMIs, and flexible repayment terms, these loans provide the necessary support to overcome business challenges and seize growth opportunities.
Whether you’re looking to expand operations, manage cash flow, or invest in new projects, unsecured business loans can help you achieve your business goals.
Frequently Asked Questions
Who can apply for an unsecured business loan?
Business owners who are looking to expand their business, upgrade machinery, manage day-to-day operations, etc., can benefit from an unsecured business loan.
What are the eligibility criteria for unsecured business loans?
To qualify for a business loan, you must have a good credit score, have filed the latest ITR, have a minimum annual revenue, and have a business plan in place.
What documents are required for an unsecured business loan application?
Bank statements, identity proof, business proof, and business tax returns are commonly required documents, but the required documentation may vary across lenders.
Can I use an unsecured business loan for any business purpose?
Yes, unsecured business loans can be used for various purposes, including working capital, inventory purchase, equipment financing, and business expansion.
