It is very common for small to medium businesses to take unsecured loans when they need funds urgently. It could be to purchase equipment, open a new branch, add inventory, business expansion or to simply meet daily expenses and improve cash flows; basically to keep your business functioning smoothly. Business loans without security are especially helpful now as the COVID-19 pandemic has severely impacted the economy.
What is unsecured business loan?
An unsecured business loan is given to a business owner without any asset being offered as a collateral or guarantee of repayment.Many financial institutions offer unsecured business loans. However, the loan comes with a slightly higher rate of interest compared to secured loans. These loans are usually processed quickly and have flexible terms of repayment. They are also flexible in a way that the business owner can use the funds for a variety of purposes.
Some financial institutions offer unsecured loans to new businesses or startups as well as established businesses. But some other offer such loans only to businesses that have been operating for threeor more years. It depends on the lender as to what type of businesses do they offer the loans to. All financial institutions do not give loans to all businesses.
Business loans without security have following advantages:
- You do not run the risk of surrendering property, gold or other asset to the financial institution in the event of non-payment or delayed payments of instalments.
- The entire process of loan application and disbursement is smooth, easy and quick.
- You have flexible repayment options and can choose your tenure from a range of options provided by the lender.
- You can build your credit history by timely repayment of instalments.
- The loan amount is not constricted by the value of your assets as you are not required to offer collateral. It is dependent on your creditworthiness and the risk-taking capacity of the lender.
How to Choose the Right Lender for an Unsecured Business Loan
Ask friends and family members if any of them have taken loans without collateral for their business purposes. If yes, seek information such as the name of the lender, services they received, their terms and conditions etc. You can use to information to compare and choose the best lender. Do your own online research regarding financial institutions offering unsecured loans tobusinesses. Each lender may have different eligibility criteria, terms of repayment, documentation requirements, processing time and of course, interest rates.
Is your Business Eligible?
To check if you qualify for a business loan without collateral, the lender may ask you for (but not limited to) these documents:
- KYC documents
- Registration documents
- PAN card
- Statement of all current loans
- Audited profit and loss statement and balance sheets for past couple of years
- GST statements
- Bank statements
- List of partners or directors
- Projected cash flows for next 2 to 5 years
- Business feasibility report
At your end, you must check not only the interest rate and repayment terms, but also if your business meets the eligibility criteria of the lenders. For example, your business may be just a year old, but the lender may advance loans only to businesses that have been operational for at least five years. Another lender may not have this requirement, but perhaps they don’t offer loans to businesses in your industry.
So, go through all the details and fine print before you choose the right lender. If your business does not qualify, say, if your credit score is not what the lender expects, first work on improving your credit score.
Similarly, if you have not prepared the feasibility report and cash flow projectionsor audited your financial statements, it is recommended that you get working on them straight away. Keep all the required documents handy before you click on the ‘Apply Now’ button.
If you find that no lender is willing to advance funds to you because your business is too new, then look for alternative sources. Startups can avail other kinds of loans under various government and private schemes. And once your business is three-year old, if you still need additional funds for expansion or anything else, you can avail an unsecured loan.
It is fairly easy to apply for an unsecured business loan. All you need to do is check online, select a lender and apply for the loanwith a few clicks of the mouse. You can choose your desired loan amount and tenure before applying. Most lenders accept scanned copies of documents; otherwise they may send their executive to your office to make it convenient for you. Usually, the approval process is very quick and the disbursement also happens without much delay.
So, availing an unsecured loan is all about setting your mind and just going for it. Once you are clear about what you seek in a lender and the amount you must avail to meet your business needs, you are good to go.