What Are Unsecured Business Loans: Guide For Startups And Small Businesses
Getting the right business finance is possibly the most critical event for a startup to ensure rapid growth. While the market relies heavily on angel investors and venture capitalists for funding, business loans are in no way behind. When availing of startup business loans in India, businesses have two ways: secured loans and unsecured loans. While businesses can easily avail of secured loans, getting an unsecured business loan can be tricky. This blog post tells you about unsecured business loans and how to go about them. Read along!
What Are Unsecured Business Loans?
Unsecured business loans are the financial assistance given to startups and small businesses that do not have collateral or security to offer for a loan. In today’s tech-savvy, remote-first world, not many businesses have tangible collaterals to show. In such cases, these loans come in handy. They can be utilized to expand the business and take it to new heights or maintain the cash flow. Unsecured business loans are a great funding option for businesses that don’t own physical assets, the ones that prefer not to offer security or any business that’s growing rapidly and requires capital quickly.
Some common types of unsecured business loans are:
- Term loans: Term loans are financial assistance where a bank lends money to a business, with interest adding up over time, and regular repayments are made over a set loan term
- Working capital loans: Working capital loans are the ones availed to ensure a constant flow of working capital to keep the business floating
- Merchant Cash Advance: A merchant cash advance is an advance based on credit card sales deposited in the merchant’s account. The amount here is based on the number of credit card swipes or the monthly volume of transactions
- Invoice factoring: This is a type of invoice financing where the business sells its outstanding invoices to a factoring company at a discount and receives a portion of the invoice balance as an upfront payment
- Revolving credit: Revolving credit refers to an open-ended credit account like a credit card or other lines of credit that can be leveraged and repaid as long as the account remains open
How Do Unsecured Business Loans Work?
Unsecured business loans are usually availed by showing a business’s creditworthiness or an entrepreneur’s credit score. However, in addition to this, a legal agreement is also drawn that specifies that the borrower will repay the debt with their personal capital if the business fails to repay the same on time.
When any business approaches the lenders for an unsecured business loan, the business’s ability to repay the loan is strictly scrutinized. This is so because providing them with a loan can be a risky business. Lenders determine the repaying ability by looking at the business’s bank statements, income tax, GST returns, etc. Additionally, the business’s detailed plan, business operations, and roadmap are also thoroughly checked to understand what the future looks like for the business.
Once the application process is done and the loan is sanctioned, the business starts repaying the loan in installments that also consider the interest accrued. The loan can be paid off early in full, subject to prepayment charges by the lenders. Some lenders also provide a Flexi-loan facility that allows borrowers to reduce their EMI outgo.
Unsecured business loans can be availed by either visiting the online portal of lenders or directly voting at their physical branch offices, filling out the application forms, and submitting them along with the necessary documents.
Features Of Unsecured Business Loans
Unsecured business loans have many features that make them favorable. Here are the top 5 features that make these loans a go-to for many startups:
- No collateral needed: Aimed at making the entire process of getting urgent loans easier, unsecured business loans do not need any proof of security from the business
- Quick approval: If the borrower meets all the eligibility criteria laid down by the business loan lender and produces the necessary financial documents, the loan application gets processed much faster, and the amount would get instantly sanctioned with quick approval. The loan amount can be anywhere from INR 50,000 to up to INR 50 lakh, depending on the business size
- Minimal documentation: The documentation required for unsecured business loans is minimal and can be easily furnished by the business without any hassle
- No equity dilution: Unlike venture capitalists and angel investors, the lenders of unsecured business loans do not expect the equity in return for the loans
- Shorter loan tenure: Most unsecured business loans are short-term loans ranging from 1 to 5 years or more. It makes it easier for businesses to maintain a positive cash flow position and gives them freedom from long-term EMI repayment
Differences Between Unsecured Business Loans And Secured Loans
If you are unsure if your business should be opting for secured business loans or unsecured business loans, the following might help:
|Differentiator||Secured business loans||Unsecured business loans|
|Need for collateral||Requires surety through pledging collateral||No collateral required|
|Borrowing limit||Higher due to the provision of security||Lower as no security is required|
|Risk for lender||Almost no risk to the lender||High risk to the lender|
|Interest rates||Usually lower||Higher|
|Repayment tenure||Longer||Comparatively shorter|
|Formalities||Involves a lot of formalities to get sanctioned||Quicker to avail due to minimal documentation|
What Are The Pros and Cons Of Unsecured Business Loans?
As with any funding source, unsecured business loans also come with their own pros and cons.
For the borrower, the loan is predominantly low-risk as they are not pledging any collateral. In case the business fails and the borrower charges bankruptcy, there is also a chance that the debt will be discharged. However, for the lender, the same factor makes unsecured business loans highly risky. But, we should not forget that the borrower stands to lose their credit score if they default on the loan. Also, since the risk is higher, the interest rates tend to be on the higher side.
Another prominent advantage of unsecured business loans is that the loan application, approval, and disbursement process are quick and easy. However, the loan amount availed can be smaller than what is required.
Unsecured Business Loan Eligibility Criteria
Like any funding source, unsecured business loans have some criteria that need to be met by businesses:
- 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
- Minimum of one year of profitable operations, and operating from the same site for the previous year
- The applicant must have a steady source of monthly income, as evidenced by payslips
- Bank account information or a bank statement for the previous six months
Interest Rates And Other Charges On Unsecured Business Loans In India
Here are the interest rates for unsecured business loans from some prominent financial institutions in India.
|Bank Name||Interest Rate||Processing Fees|
|14 % – 24 %||2.5% to 3 % of the loan + GST|
|16.25 % – 18 %||2% to 3 % of the loan + GST|
|14 % – 24 %||1.25% to 3 % of the loan + GST|
Kotak Mahindra Bank
|14 % – 24 %||2% to 3 % of the loan + GST|
|16 % – 24 %||1.99% to 3 % of the loan + GST|
|17 % – 18 %||2% to 3 % of the loan + GST|
|13 % – 16.65 %||2% to 3 % of the loan+ GST|
|19 % – 20.15 %||2% to 3 % of the loan + GST|
|14 % – 17 %||2% to 3 % of the loan + GST|
|16 % – 21 %||1.5% to 3 % of the loan + GST|
Bajaj Housing Finance
|18 % – 20 %||2% to 3 % of the loan + GST|
|16 % – 20 %||2% to 3 % of the loan + GST|
|18.5 % – 22 %||1.5% to 3 % of the loan + GST|
|16.25 % – 22 %||2% to 3 % of the loan + GST|
|17.5 % – 19.75 %||1.5% to 3 % of the loan + GST|
|21 % – 26 %||2% to 3 % of the loan + GST|
|18 % – 26.99 %||2% to 3 % of the loan + GST|
|17 % – 18 %||2% to 3 % of the loan + GST|
|18 % – 25 %||2% to 3 % of the loan + GST|
What happens if I default on an unsecured loan?
Even if you don’t use collateral to secure your loan, there are still consequences if you don’t pay. For example, the lender can take legal action against you to reclaim some or all of the loan or commission the collection agency for collecting the debt.
What is a Flexi-loan feature?
This feature helps business owners get loans per their requirements and repay with enough cash flow. The feature 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.
Who can benefit from unsecured business loans?
Unsecured business loans can benefit SMEs, professionals, manufacturers, service providers, and traders for their business expenses.
Why is CIBIL score important for unsecured business loans?
CIBIL is the credit checking score of the applicants with the bank about their repayment capacity. It helps lenders check whether he/she has a creditworthy relationship with the bank and determines their capacity to repay the loan within the term.
At Velocity, we believe financial literacy is the first step to achieving greater heights for any business. In our journey to ensure every entrepreneur is fully aware of their options for funding their dreams, we constantly come up with crisp, informative, and enlightening content. You can check out our other blog posts on other funding sources here: