Unsecured loans are a type of funding, which is offered without the applicant having to provide any collateral to the bank or NBFC. These unsecured business loans are given on the basis of an applicant’s financial documents, credit score, income, etc. Since there is no collateral required, the risk factor remains high for the bank or NBFC.
Types of Unsecured Loans
The various types of unsecured loans are:
What is Unsecured Business Loans?
These are loans taken with the intent of starting a new business, maintaining or expanding an existing business, or for any other business need. These loans inject fresh capital into the business and help the entrepreneurs or management to realize the organisation’s true potential. The unsecured business loan interest rates offered by financial institutions starts from 13% onwards.
- The business should be based in India
- Minimum age of the applicant should be 18 years and maximum 65 years
- The applicant should be in a stable job. In case of self-employed individuals, their business should be in operation for at least 3 years and last 2 years in profit
- The loan applicant should have a basic minimum salary. The higher your income, the bigger the loan amount you can avail
- The applicant must have a strong credit score
Features of Unsecured Business Loan
Different banks have varied criteria and features for their unsecured business loan products. Here are some common features of these loans:
- Business loans are given without any collateral
- These loans are given on the basis of the creditworthiness and repayment history of the applicant. Other necessary criteria may also be considered by the lender
- In most cases, banks require that the said business be in operation for at least 2 years with profit
- The loan amount can vary from Rs. 50,000 and go up to Rs. 50 lakh, depending on the business size and need
- The tenure of the loan is usually flexible and can range from 1-5 years, or more
- Most banks also offer an unsecured business loan with an overdraft facility
Start-up enterprises, business owners, retailers, traders, manufacturers, SMEs, MSMEs, private companies, public companies, large enterprises and partnership firms can apply for an unsecured business loans
Benefits of Unsecured Business Loan
- Easily Accessible: All that an applicant needs to do is fill out the application and submit the necessary documents. The loan process can also be done online.
- Loan Based on Income: Banks give loans based on the applicant business’ income. Higher the applicant’s income, the higher will be the loan amount. This is because banks assume that high income businesses will have the capacity to repay bigger loan amounts.
- Minimum Documentation: There is minimum documentation so the loan process is hassle free.
- No Collateral: There is no collateral required for this loan. Therefore, the applicant does not have to worry on the bank taking over their business assets.
- Established Business: An unsecured business loan works for established business persons with strong credit scores.
Points to Note
Just like other loans, an unsecured business loan also has some points that applicants need to note:
- Interest: The rate of interest on unsecured loans is high. There is no collateral and so the banks consider it to be a risky investment. Therefore, a higher rate of interest is charged from the business for the unsecured business loan.
- Short Tenure: An unsecured business loan can be availed for a limited tenure. The maximum tenure that banks allow is 5 years, in most cases.
- First Time Loan Applicants: This loan is not ideal for start-ups and entrepreneurs. The banks check the credit worthiness and repayment history of the applicant. In this scenario, first time applicants seem like risky investments.
- Bad Credit Score: Applicants with a bad credit score will find it very difficult to avail this loan as there is no collateral that can work against the higher risk banks will have to take.
Difference between Secured Loans and Unsecured Loans
- Tenure: Secured loans have a much higher tenure than unsecured loans. In secured loans, the maximum tenure can go up to 15 years. In unsecured loans, the maximum tenure is usually of 5 years or less
- Rate of Interest: Since the risk factor in unsecured loans is high, the rate of interest will also be high. In secured loans, since collateral is already given, the rate of interest is comparatively low
- Collateral: In secured loans, an applicant has to provide a type of collateral – a movable or an immovable asset. Failure to repay the loan will lead to loss of the hypothecated / mortgaged asset. This is not the case in unsecured loans. There is no collateral and so the applicant’s assets are safer
- Requirement: Secured loans are taken based on specific requirements. For example, car loans are taken for cars, home loans for purchase of a home or renovation. Unsecured loans may be taken for unspecified purposes and can be used in accordance with the applicant’s wishes, as long as they are not prohibited
Factors Affecting Unsecured Business Loan Eligibility
- Age: Youngsters or start-up enterprises are considered to be risky investments, as they do not have a history of strong business management or leadership. This is because they are just starting out and are considered unproven candidates by the bank
- Job Stability: It is important that their business be operational for at least 3 years. Stable businesses are considered more loan-worthy as compared to newer organisations
- Credit Score: The credit score is a measuring stick on which the creditworthiness of an individual is judged. The score is based on loan and credit card payments made by the applicant. It is measured on a scale of 900 points. Individuals with a credit score of 750 points or above are considered loan worthy
- Income: Some banks require that the applicants have a minimum salary bracket. In unsecured loans, income is of vital importance as the amount of loan that can be borrowed heavily depends on the applicant’s salary
- Businesses with Accounts in Bank: A bank prefers to give loans to companies that have accounts with the bank. These businesses can easily avail a loan as the bank has prior experience of working with them
Things to remember
- Offer Document: This document explains in detail the nitty-gritty of the loan. It is advised that the applicants go through it once before committing to anything. It would also be helpful, if they seek the help of a finance expert in order to understand the loan particulars
- Prepayment Fee: Prepayments are payments made with the intent of foreclosing a loan before its due date. Banks may charge a prepayment fee or waive it off; based on the relationship of the borrower has with the respective bank or NBFC
- Rate of Interest: There are two types of interests: fixed and floating. In a fixed rate of interest, the EMI amount remains the same. On a floating rate basis, the EMI amount keeps fluctuating as the rate of interest keeps changing. This is because on a floating rate basis, the interest rate is dictated by market forces and RBI guidelines
Frequently Asked Questions (FAQs)
Ques. Where can I get an unsecured business loan?
Ans. To avail any types of business loan you may visit the nearest branch of the desired bank or shall go to the official website of the respective bank and fill and submit the loan application form online.
Ques. What is the interest rate offered under unsecured business loan?
Ans. The interest rate offered starts from 13% onwards.
Ques. I wish to start a new business. Should I get an unsecured business loan?
Ans. Yes, you shall take an unsecured business loan preferred from NBFC as the interest rate offered by banks shall be higher as the applicant might not have financial history or good credit score.
Ques. How much money can I borrow in an unsecured business loan?
Ans. Unsecured business loans are given on the basis of the applicant’s income. Minimum loan amount that can be availed is Rs. 50,000 and maximum can go up to Rs. 50 lakh
Ques. What is the minimum and maximum repayment period of unsecured business loan?
Ans. The repayment period of unsecured business loan is 12 month to 5 years.
Ques. Is the interest rate offered under unsecured business loan high or low?
Ans. The interest rates on an unsecured business loan are relatively higher, as compared to secured loan because there is no collateral submitted to compensate the loan in case of non-payment.