The growth of a business is hugely dependent on the continuous flow of funds and that may be required to fulfil an order, purchase equipment, expand the business, pay to the workforce, etc. A large business may somehow manage to get these funds but for a small business, it is not easy to get cash without collateral. In such cases, they borrow money from banks or other financial institutions in the form of a business loan. A business loan like other loans in India is offered at competitive interest rates by many lenders based on the type of loan availed.
Types of Business Loans
Business loans or commercial loans are broadly categorized into two
Secured business loans: These are loans that are given when the borrower pledges an asset like land, house, stock, etc as collateral for the debt. In case the borrower is unable to pay, the lender may claim the asset
Unsecured business loans: These are loans that have no collateral but still the lender can claim the borrower’s asset if the repayment is not made.
What is an unsecured business loan?
An unsecured loan is a loan that is given based on the credit history of the borrower and requires no collateral for availing it. Small business owners are the most likely applicants for these loans and are utilized to expand or maintain the business or to maintain the cash flow. It can be used to add more capital to a business that aids in realizing the goals of the organization. The interest rates vary based on the lender and are more than 14.99%.
Though the traditional definition of an unsecured loan is that there is no need for collateral, it works a little different from what is defined. Instead of asking for specific collateral which gets hypothecated to a bank or the financial institution they apply a general law on business assets till the repayment of the loan is fully completed. This allows people with high creditworthiness or those with good business to get loans without having to pledge their big assets to small business loans.
Additional Reading: Business Loan Interest Rates
Online Unsecured Loans
There are many online lenders also available apart from the traditional lenders. These online lenders do not follow strict standards of creditworthiness and hence those with an average credit profile can also get an unsecured business loan from them. But the drawback of this is that these loans charge a higher interest rate than the traditional bankers.
Benefits Of Unsecured Business Loans
Zero collateral: One of the most important advantages of an unsecured business loan is it does not need any collateral for security. This makes it perfect for small or medium-sized businesses that do not have any great assets in business as they have just started out or are struggling to continue its business.
The loan process is easy: The procedure to apply for the loan is simple and easy and can be done by anyone without any technical knowledge. It can also be done online through a lender website or by going to the local branch.
Offers flexibility: A collateral-free business offers great flexibility as it offers a unique Flexi loan feature. This feature helps business owners to get loans as per their requirements and repay when they have enough cash flow. It also provides the option to pay only the interest as the EMI and the principal amount can be paid at the end of the loan term.
Very less documentation: The process of getting these unsecured loans is hassle-free as there are minimum documentation and less paperwork.
Loan disbursal is quick: Due to less paperwork needed for processing the application the loan disbursal is faster and that helps when businesses are in need of quick cash. The same is not true with secured loans as they have to verify the assets and their related papers.
No restrictions on usage: While the secured business loans can be availed only after specifying the objective of the loan, unsecured loans have no such regulations. The borrower can use the money as deemed fit but should be used for business expenses.
Additioanal Reading: CreditMantri Guide to Business Loans
Features Of Unsecured Business Loans
The unsecured business loans can be applied by business owners of small and medium-sized manufacturers and traders, etc. While different banks have different products most of them have the following features.
These loans are disbursed without the need for any collateral
The loan tenure is flexible and can be from 1 to 5 years or more
Most unsecured loans come with an overdraft bank facility
The loan amount can be anywhere from Rs 50,000 to up to Rs 50 lakh and depends on the size of business
The borrower’s credit history of repayment and income is considered while approving the loan.
There is a high approval rate for unsecured business loans if you fulfil the minimum eligibility criteria. Hence it is essential that you compare the loans and interest offered by various banks before applying for it.