Everybody at one point in time, dream of running their own business and not working under someone, become the next Steve Jobs or Bill Gates, but only a few try to live that dream. This is because starting a business is scary and risky. You are venturing into the unknown with just your business plan and your trust in it.
You will have to start from scratch with little to no experience in running a company and to generate cash flows to sustain your business. For a business to sustain itself, it will take time, funds and solid business plan for your business to show any signs of profit.
This initial fund that is required to start your business or to sustain your business will depend on you as you need a loan for this. There are 2 types of loans that you can get
1. Secured loans
This is the case where you put up collateral like your home, land, bond, fixed deposits etc. as per the banks requirement equaling the loan amount. These loans have lesser interest rates compared to unsecured loans as the banks have a security in case you default.
2. Unsecured loans
This is the case where loans are provided to you solely based on your credit worthiness without any collateral. In this scenario your credit score earnings matter most. The interest rate will be higher here as the bank will try to recuperate most of its earnings as soon as possible to avoid losses due to any defaulting on the EMI.
In this article we are going to discuss all about unsecured loans otherwise known as no-collateral loans – how it is beneficial to you and what you need to be careful about.
How to get an unsecured loan – Process and loan eligibility
Once you apply for a loan, the bank will pull your credit score from any one of the credit bureaus operating in India – CIBIL™, Equifax, Experian and CRIF High Mark. They will check for the following on your credit report.
· Your past loan accounts
· Repayment History
· Past Payment Defaults
· Negative Accounts on your Credit Report
After checking your credit score, banks will check your income and your repayment capability. Banks will allow EMI to be only 40% to 45% of your monthly income. Based on this your loan amount will be determined. More the income you have more the loan amount.
After this your documents pertaining to your business and other documents will be verified and if all the criteria laid out by the lender is met, your loan amount would be disbursed.
Benefits of unsecured loans
1. Fast approval
The term “No collateral” tells you everything – you don’t need to pledge any collateral and hence the risk from the side of the borrower is minimal. You will not lose any of your assets in case you are unable to repay your loan.
2. Bad credit not a problem for already existing business
For people trying to get a loan for say expansion of their business, they can get loans based on their company’s performance. Even if the owner has bad credit health, loan can be obtained using the company’s financial strength, growth and revenues.
What you need to be careful about
Though unsecured loans have its advantage, there are some points that you need to remember
1. Smaller loan amount
Since it is an unsecured loan, you might not get the loan amount you are looking for. Being an unsecured loan, the risk involved for the bank is high and they will look to reduce to the maximum.
2. Higher interest rate
As mentioned earlier, the rate of interest will be higher as the risk for banks is very high. The rate of interest will vary between 12% to 24% based on various internal factors that bank use to calculate your interest, amount and tenure. The result of higher interest rate is the larger EMI you will have to pay. This could be a problem if your business does not have enough cash flows to pay the EMI.
Ways you can secure a “No Collateral” loan
To make sure your business loan applications are not rejected follow these steps
a) Improve your credit score
Before you apply for a loan check your credit score. If you see that it is less, try and improve it. Your credit score is the first level of check that the bank does. If it is less your application will be rejected immediately.
b) Keep your business plan on hand
It is best to prepare a business plan and keep it ready when meeting the bank officials. This plan should have details about your business, expected revenue streams, the growth of the business and repayment period. This creates a positive impression on the bankers that you are prioritizing the loan repayment.
c) Analyze your options
Compare various lenders to see who will match your requirement. You would be required to look into the
I. Interest rate
II. Processing fees
IV. Speed of processing