Most of the banks and NBFCs offer unsecured business loans in which no collateral or security is to be provided by the borrower. However, it becomes tricky for some borrowers, as few of the financial institutions require collateral in the form of property, raw materials, stock, machinery or equipment for specific loans related to business activities.
Borrowers prefer to opt for business loan without providing any collateral. Therefore, they can avail business loan without security. As such loans are quite risky from a lender’s perspective; their interest rates are comparatively higher than secured loans.
Thus, there are two types of Business Loans:
- Secured Loans – To avail this business loan, borrowers need to pledge collateral
- Unsecured Loans – No security or collateral is required by the financial institution
What are Loans for Business without Security?
A business loan that is taken either from a bank or any other NBFC, without the guarantee of collateral is called an Unsecured Business Loan or a Business Loan without Security.
Raising a huge chunk of capital is not an easy task. Banks will be your best bet to raise that chunk of capital to fuel your business. Every running business needs enough capital to sustain in the long run. Having enough capital ensures that your business’s working capital needs doesn’t get hampered. Loan without security shall ensure regular payments for your staff, buying plant or machinery, or raw materials, opening a new office, etc.
Unsecured Loans are perfect for businesses that do not own big assets or expensive machinery and are looking for funds to start or expand their business. The needs can vary, such as for a small business looking to open a new office or a completely new set up in a different location or looking to add on small equipment to their existing set up and so on. Banks will happily lend to well-running entities that are in need of urgent funds but cannot provide collateral to secure a loan.
Features of Loan for Business without security
No collateral required
The very first characteristic of unsecured business loan is that it does not require collateral or security. This feature makes it ideal for Small and Medium sized enterprises (SMEs) that do not own substantial assets. Businesses belonging to the service sector are ideal to secure an unsecured loan.
Relaxed criteria for loan approval
Business loans without security are very easy going. Even Non-banking Financial Companies (NBFCs) offer business loans online to make it more convenient for you. The loan procedure is quick and gets approved immediately without excess documentation. Once approved, the loan amount is disbursed in your account within a few working days.
Higher rate of interest
Lending unsecured business loans is a risky proposition for lenders and therefore, its interest rates are higher than those applicable on secured loans. Lenders often negotiate the rate of interest based on several factors like the amount of loan taken, annual income of the applicant, employment status and other details.
Where to get Loan for Business without security?
Private/Public sector banks
Almost every public and private sector bank offers business loans without security to its customers. Some of the popular banks include ICICI Bank, HDFC Bank, State Bank of India (SBI), Axis Bank, Kotak Mahindra Bank, Corporation Bank, Bank of Baroda, Punjab National Bank (PNB), Yes Bank, Syndicate Bank and many more.
Non-banking Financial Companies (NBFCs)
Unsecured Business Loan Eligibility
The eligibility criteria may differ from lender to lender. However, most often the lending institutions consider the following factors before approving an unsecured business loan application request:
- Age: This is one of the very important factors that a lender considers when reviewing a business loan application. Most banks look for an age bracket anywhere between 21 to 65 years before they disburse unsecured business loans to individuals. But it can vary from one lender to another
- Business Performance: Your current business performance is the next crucial factor that will decide the fate of the loan. No bank will provide you with an unsecured loan if your business is not stable or not performing well enough. Banks will definitely prefer for your business to show the signs of growth. Your business stability not only increases the chances of obtaining the loan but also influences the amount of loan that the bank will choose to lend
- Business existence: In case of regular business loans, lenders hand out money only to those who are capable of paying it back. This means many lenders are not willing to bet on new business as they do not have enough experience. To avail a regular unsecured business loan, lenders will prefer you to stay in the business for at least 3-5 years
- Credit Score or Credit Rating: Credit score and credit rating are numerical representation of your creditworthiness. If you are availing unsecured business loan in the name of your business, lenders will consider credit rating to assess your loan application. But if an individual is applying for an unsecured business loan then credit score will be considered to assess your creditworthiness. A strong credit history in both the cases will help you avail the loan easily. Businesses with a good annual turnover are the perfect borrowers for banks
Key points to remember
Certain things you should take into consideration before you opt for an unsecured business loan.
- Before signing the loan contract, read the documents carefully and sought the help of a financial expert to understand the clauses and details of the loan
- The other thing is that you should not choose to ignore is the rate of interest at which the loan is offered to you by the bank that whether it is fixed or floating rate of interest
- Other details such as processing fee, penal charges, stamp duty, foreclosure fee and repayment tenure should also be taken into consideration before signing loan documents
Apart from banks and NBFCs, there are many other lending institutions that offer unsecured business loans. They can be availed quickly and are usually of short-term in nature.
In conclusion, loans in India without security are a blessing to the small and medium-sized business entities, as you do not need to pledge any form of collateral in order to secure a loan. The maximum loan tenure of the business loan is 15 years with multiple repayment options. In fact, unsecured business loan is a perfect solution for businesses that are planning to take the next leap in their business and are in need of a financial push.