Securing business loan is tricky for most borrowers. This is because most lenders require you to provide collateral in order to secure business loan from them. Collateral could be in the form of any asset such as property and even investments. Collateral makes lenders secure of the fact that the borrower will repay the loan amount on time and even if they don’t, they will have the right to recover the outstanding loan amount by selling the pledged asset of the borrower. But what if the borrower doesn’t have collateral to pledge? In such cases, borrowers can opt loans for business without security. Since such loans are quite risky from a lender’s perspective, their interest rates are usually much higher than secured business loans.
Thus, there are two types of Business Loans:
- Secured Loans – To avail this business loan, borrowers need to pledge collateral
- Unsecured Loans – This business loan, no security or collateral is required by the lending 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 doesn’t shut down too soon. This will ensure regular payments for your staff, buying machinery, or raw materials, opening a new office, etc.
Since an unsecured loan is without any security or collateral, the lender offers a much higher rate of interest. Thus, opting for a secured loan is a better bet from a business perspective as the rate of interest is quite low. However, if attaching collateral is a concern, even unsecured loans can be taken for business purposes.
Unsecured Loans are perfect for businesses that do not own big assets or expensive machinery and is 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 arsenal 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 those businesses that are small or medium-sized and 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. NBFCs (Non-banking Financial Companies) even 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 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 business 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.
Benefits of Loan for Business without security:
- Lesser paperwork
Minimal documentation makes the whole process of acquiring unsecured business loans hassle free.
- Quick disbursal
Since unsecured business loans involve minimal paperwork, it is processed and disbursed faster. On the other hand, secured loans take longer for disbursement as the verification of the collateral and related documents takes time.
- Easy application procedure
It usually has a very simple loan application procedure. You can apply for it online either through the lender’s website or through an online lending platform or offline by visiting your lender’s nearest branch.
Where to get the Loan for Business without security?
In India, many banks both private and public offer unsecured loans i.e. loans for business without security like ICICI Bank, HDFC Bank, State Bank of India, Axis Bank, Kotak Mahindra Bank, Bank of India, etc.
- Non-banking Financial Companies (NBFCs)
Unsecured loans are also provided by NBFCs to businesses across India. Just like many banks, NBFCs also make it possible for applicants to apply for unsecured business loans online. This makes loan application very convenient, since the applicant will not have to visit the office of the lender.
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 a 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 23 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. Usually, banks give a loan amount of up to 60% to 80% of your annual profit.
- Experience: 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 credit worthiness. 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.
Unsecured loans are easily available and all leading banks and financial institutions provide them if you meet their eligibility criteria. You can even apply for it online as most banks have made it more accessible through this channel.
Top 3 things to note while opting for Loans for business without security are:
However, there are a 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. The rate of the interest of an unsecured business loan is a little higher as compared to that of a secured business loan.
- Other details such as foreclosure fee and tenure should also be taken into consideration.
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 tenure of the loan usually does not exceed 5 years. The repayment options are multiple. 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.