written by | May 6, 2022

What are Unsecured Business Loans? Types and Advantages

Banks provide an unsecured business loan to the borrowers without furnishing any security or collateral to the bank or NBFC. The banks grant the loan based on credit history, credit score, financial records, the income of the borrower, etc. You can use the unsecured business loan for a startup to establish a new business or firm and help the company manage the cash flow in the initial phase.

The borrowers are generally small business owners as these types of loans help them meet their immediate working capital requirements and for smooth operations of their business. However, the risk factor is also there for the banks and NBFC as there is no security or collateral in such loans.

Did you know?

For an unsecured business loan, the maximum loan amount is ₹50,000, and the minimum business turnover required is ₹1,00,00,000.

What is MSME Unsecured Loan?

Types of Unsecured Business Loans

Term Loan

You must return any loan you take for a certain period, secured or unsecured in EMIs over a set period.

Working Capital Loan

You can use a working capital loan to cover day-to-day business expenses and is approved based on the applicant's credit and repayment capabilities.

Overdraft

An overdraft is a loan or credit limit granted by a lender that the borrower can use in instalments determined by the financial institution. The interest rate applies to the amount that has been used or borrowed from the allotted or sanctioned credit limit.

Also Read: How to Compare Business Loan Interest and Apply For a Loan?

Loans Under Government Schemes

The government has started various initiatives for small business owners to obtain a loan at a lower interest rate. These initiatives are Start-up India, Prime Minister Employment Generation Program, Mudra Loan, SIDBI's loans in 59 minutes, CGTMSE, i.e. Credit Guarantee Fund Trust for Micro and Small Enterprises.

Revolving Credit

A credit limit on a revolving loan specifies the maximum amount of money a borrower can withdraw at any given moment. The borrower has the freedom to withdraw as much money as they need within the given time frame and limit. This loan form does not constrain the borrower by rigid instalments.

Consolidation Loan

A consolidation loan is a straightforward loan that borrowers use to pay off pre-existing credit card debt or other unsecured debt.

Merchant Cash Advance

A merchant cash advance is a cash advance based on credit card sales deposited in the merchant's account. The loan amount is determined by the business's credit card swipes or monthly volume.

Micro Loans

These are loans given to a borrower to meet their short-term cash requirement. Microfinance institutions provide these loans from a range of ₹5000 to ₹2 lakhs.

Business Credit Cards

Entrepreneurs can use their business credit cards to get business loans. The loan amount is essentially a credit line(s) granted by the lender to cover a business's working capital needs.

Unsecured Business Loan Eligibility Criteria

The unsecured business loan eligibility criteria are as follows-

  • Criteria for Age: At the time of loan application, you must be at least 18 years old, and at the time of loan maturity, you must be at least 65 years old.
  • A credit score of 750 or higher is required.
  • Existence of the Company: Minimum of one year of profitable operations, operating from the same site for the previous year.
  • The applicant must have a steady source of income, as evidenced by payslips.
  • Bank account information or a bank statement from the previous six months.

Features of Unsecured Business Loans

Different banks offer different criteria and benefits for their unsecured business loan packages. Here are some of the most typical characteristics of these loans:

  • There is no need to put up any collateral when applying for a business loan.
  • These loans are granted based on the applicant's creditworthiness and payback history. The lender may also take into account other important variables.
  • In most cases, banks demand that the business has been profitable for at least two years.
  • Depending on the size and needs of the firm, the loan amount can range from ₹10,000 to ₹50 lakhs.
  • The loan's term is usually flexible, ranging from one to five years.

Unsecured business loans are available to startup businesses, business owners, retailers, traders, manufacturers, SMEs, MSMEs, private companies, public companies, major corporations and partnership firms.

Unsecured Business Loans Benefits

Zero Collateral

One of the most significant benefits of an unsecured company loan is that it does not require any security. This makes it ideal for small and medium-sized firms that do not have many assets in their portfolio since they are just getting started or are trying to stay afloat.

The Loan Application Process

It is straightforward, and anyone with a basic understanding of technology may complete it. You can also do it at a local branch or online through a lender's website.

Multi-Purpose Loans

Secured loans are usually fixed, and most of them can only be used for a certain purpose, such as car loans to buy a new car, home loans, etc. On the other hand, unsecured business loans provide the flexibility to use the funds for various objectives, and you are not obligated to utilise them for any certain purpose.

Offers Flexibility

Because it has a unique Flexi loan feature, a collateral-free business gives a lot of freedom. This feature enables business owners to obtain loans that meet their needs and repay them when they have sufficient cash flow. It also gives you the option of paying simply the interest as an EMI and paying the principal after the loan period.

There is Very Little Documentation

Obtaining these unsecured loans is because there is very little documentation and paperwork.

Loan Disbursement is Quick

Because there is less paperwork involved in processing the application, loan disbursement is quicker, which is beneficial for firms needing immediate cash. On the other hand, secured loans need verification of assets and accompanying documents.

Also Read: How to Get an Unsecured Machinery Loan in India

No Restrictions on Use

Unlike secured business loans, which you may only obtain after identifying the loan's purpose, unsecured loans have no such restrictions. The borrower can spend the money in any way they see fit, but it should be used for company purposes.

The upfront costs are lower or sometimes not required at all.

Increased Loan Amounts

You can apply for a larger unsecured company loan because no asset serves as security and limits the loan size. In contrast, if you ask for a secured company loan, you will only be approved for the amount that the collateral is worth.

Flexibility

In most cases, financial organisations expect you to repay the loan in predetermined monthly instalments over a set period. Even if you qualify for the credit, repaying the loan amount can be difficult. In this case, an unsecured loan may be the best option because these lenders also provide flexible payment options.

The overall cost is usually higher because the lender has a higher risk.

Unsecured Business Loan Interest Rates

The interest rate on unsecured business loans issued by major banks and NBFC starts at 14.99 percent per year and goes up from there. On the other hand, interest rates will vary from bank to bank, depending on the applicant's profile and company needs. The interest rate on an unsecured business loan is determined by several factors, including the applicant's financial history, CIBIL/credit score, repayment ability, creditworthiness and annual turnover.

These are loans used to start a new business, sustain or expand an existing one or any other commercial requirement. These loans provide new cash to the company and assist the owners or management in realising the company's full potential. The interest rates on unsecured business loans issued by financial institutions start at 14.99% and go up from there.

Documents for Obtaining an Unsecured Business Loan

 The following are the necessary documents for obtaining a business loan-

  • Identity proof, passport size photo, signature proof, address proof, bank statement.
  • Business continuity documents and other documents
  • Professional qualification certificate in case the borrower is a professional
  • Customer letter for end-use of funds in case of DP/OD limit
  • OD limit sanction letter is also required
  • Partnership deed or AOA or MOA
  • Form 3CB and Form 3CD in case of companies

Conclusion

The unsecured business loan is the best available option if the loan is required without security. Unsecured loan applications are generally faster, and they have fewer complications than secured loans. You can obtain the loan in a few days, and there is a lesser risk for the borrower as no security is involved. This loan is usually offered based on credit history, and thus you can obtain an unsecured business loan very easily.

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FAQs

Q: What are the purposes of unsecured business loans?

Ans:

Unsecured business loans can be utilised for many different things. The application process is typically easier and faster than a traditional company loan.

You can use business loans for a variety of purposes, including:

  • Increased cash flow
  • Expansion of the company
  • Purchase of stock or an asset
  • One-Off costs
  • Premises expenses

Q: Is it possible to acquire an unsecured business loan from an NBFC for a new business?

Ans:

Yes, you should choose an unsecured business loan from an NBFC over a bank because the interest rate offered by banks will be greater. After all, the applicant may not have a solid credit score or financial history.

Q: Is it true that car loans are unsecured?

Ans:

No. Because the lender has the title to the vehicle and can repossess it if it is not repaid, car loans are classified as secured loans, and personal loans and credit cards are unsecured.

Q: What are the primary benefits of taking out an unsecured loan?

Ans:

Unsecured loans make it easier for firms to borrow money because the lender does not demand collateral, and you should keep it in mind. However, unsecured loans frequently have higher interest rates because the lender's risk is larger.

Q: How does an unsecured loan compare to a term loan?

Ans:

When you take out a secured loan, you will be required to offer collateral in machinery, equipment or real estate, and an unsecured loan does not require collateral. However, this distinction impacts interest rates, loan conditions and the amount you can borrow.

Q: On an unsecured business loan, what is a personal guarantee?

Ans:

Lenders sometimes request a personal guarantee from a company director who wants an unsecured loan, and lenders prefer this arrangement since it decreases their risk. While they may appear to be a large commitment, personal guarantees are frequently used to assist businesses in obtaining larger levels of capital.

Q: Is a small business loan secured or unsecured?

Ans:

Unsecured business loans are those that do not demand collateral. A secured loan employs assets as collateral, implying that if things don't work out, the lender can collect the loan's cost by selling the assets. The difference between secured and unsecured business loans boils down to risk for the lender.

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