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Is Unsecured Business Loan Safe for Small Businesses

Do you own a small business and in need of funds? Exploring unsecured business loans but not sure how safe it is? Read through to get all your questions answered.

Small businesses often face challenges with funds. They do not have enough assets to pledge as security for a larger amount. Unsecured business loans can behavior for the small businesses here. Let us understand what exactly this unsecured business loan is. 

It is a type of funding where an applicant can get a loan without producing any collateral. Banks or financial institutions offer unsecured business loans to applicants basis their financial documents, credit score, income, etc. Star ups often avail of this loan to start their new business and manage their ongoing business function. As there are no collaterals produced the risk factor on the bank’s part goes high on the other side from a borrower’s perspective such loans are safer and more secure than secured loans. 

The Salient Features of the Unsecured Business Loans:

While different banks might have different criteria and features for giving unsecured business loans, some common features of these loans are as follows:

  • No collateral is required to avail of these types of business loans.
  • The most common criteria are the creditworthiness and repayment history of the applicant. Some institution might have their own additional criteria too.
  • Mostly it is preferred that the business should be in operation for at least 2 years with profit.
  • There is no limit to the loan amount. It may vary from Rs. 10,000 to Rs. 50 lacs based on the business size and need.
  • These loans usually come with the flexibility of duration and in most cases range from 1-5 years, or beyond.

Who all can Apply for Unsecured Business Loans?

Any start-up business enterprises, small business owners or retailers, manufacturers and traders, Small Medium business Enterprises, MSMEs, private and public companies, large enterprises, and partnership firms are eligible to apply for unsecured business loans.

Who are the unsecured business loan providers in India?

There are plenty of options as almost every banking and financial institution grants unsecured business loans to the customers. Having said that, the interest rates and the eligibility criteria may differ from one lender to another.

What is the Interest Rate on Unsecured Business Loans?

Although the interest rates for unsecured business loans mostly vary from bank to bank or NBFCs it starts from 11.90% as the usual rate of interest per annum. The reason for varied interest rates is large because of the applicant’s individual profile and business requirements. The varied unsecured business loan interest rate depends on multiple factors like an applicant’s financial history, their CIBIL or credit score, creditworthiness, repayment capability, annual business turnover, and more.

What are the eligibility criteria for unsecured business loans?

Some of the basic criteria to be eligible for unsecured business loans in India are as follows: 

  • One should be a citizen of India with no criminal history.
  • The minimum age limit starts from 18 years (at the time of loan application) and the maximum age limit is 65 years at the time of loan maturity.
  • CIBIL Score should ideally be 750 or more.
  • The business should be in existence for a minimum of 1 year with growth or profit. Also, it should be operating from one location for at least 1 year.
  • Applicants must have a regular source of income. Salary slips or bank statements with due ITR filed must be in place.
  • Total business experience should be at least 2 years in the same field of work for which the loan is being applied.

What are the Various Types of Unsecured Business Loans?

Term Loan: Both secured or unsecured loans are offered for a specific time duration and need to be repaid in form of EMIs within a defined time duration.

Working Capital LoanThis can be availed to meet the day-to-day business expenses and is approved based on your creditworthiness and repayment capacity.

Overdraft: A type of loan or credit limit assigned by the lender to the borrower which can be availed as defined by the financial institution in parts. The interest rate is charged only on the availed amount from the sanctioned credit limit.

Government schemes loans: Businesses can also opt for Government initiated loan schemes as there are many business loans at a comparatively lower rate of interest for the small business owners To name a few, there ate Mudra loan, Stand-up India, Start-up Scheme, Prime Minister Employment Generation Program (PMEGP), Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), SIDBI’s Loans in 59 minutes and many more. 

Merchant Cash Advance: This is cash in advance is based upon the credit card sales on a merchant’s account. The loan amount depends on the credit card swipes or the monthly volume of the business.

Micro Loans: Microloans are offered by the majority of the Micro Finance Institutions (MFIs). This helps to meet the instant cash requirement of the borrowing business owner. The loan amount could range from Rs. 5,000 – Rs. 2 lakh or more, depending upon business requirements.

Business Credit Cards: Entrepreneurs also have the option to take business loans against their business credit cards. 

So, in a nutshell, if we see, when compared with secured business loans, unsecured business loans are always better and safer for small businesses. Although the interest rate is a little high, there are plenty of options to choose from, no hassle of producing collaterals, low processing fee, flexible pre-payment option, quick approval, and disbursement that make it all the easier for the small business owners to leverage and meet their financial needs. Additionally, the Indian Government schemes to support small business enterprises are great relief to such small-scale business setups. 

Now that we have learned about the advantages of unsecured business loans, if you want to apply for it, find below the step-by-step process:

Step 1: Visit https://financeseva.com/ or similar financial portals to explore and compare the available business loan options offered by leading financial institutions.

Step 2: Choose the best-suited deal for your business requirements. Fill in your basic particulars like name, contact number, residential address, loan amount, email, annual turnover & profit, etc.

Step 3: Once submitted, Finance Sevacustomer care professionals will connect with you to verify and to proceed with the discussion on the chosen unsecured loan. 

Step 4: Then, your application will be sent to the respective bank for further verification for the loan and the bank’s representative will contact you to proceed with the remaining loan formalities.

Step 5: After your loan application is approved, within defined working days the approved loan amount shall get disbursed and credited to your given bank account.

For more information or to apply for unsecured business loans, feel free to call Finance Seva (https://financeseva.com/)

CA Vikas Jain - Chief Advisor

Mr. Vikas Jain is a reputed Chartered Accountant possessing in-depth understand...

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CA Vikas Jain

CA Vikas Jain - Chief Advisor

Mr. Vikas Jain is a reputed Chartered Accountant possessing in-depth understand...

Read More

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