What are unsecured business loans?
Business capital is the foremost pre-requisite, be it to start a new business or to help your start up grow. For small businesses to function smoothly, it is essential to keep the money flowing with quick and efficient small business loans. Opting for traditional bank business loans is often not very helpful, as banks demand collateral or security from the borrower and follow a time-consuming regime to process the loan. Such loans are called secured business loans.
However, more often than not, the borrower may not have any assets to pledge as collateral. It is in such situations that small businesses reach out for collateral-free loans or unsecured business loans. Unsecured small business loans are funds that can be procured by an entrepreneur without having to worry about pledging any assets.
One of the best and easy to understand example of an unsecured business loan is the credit card. Here, the credit card company assesses the borrower’s credit history and offers a personal loan at the higher-than-normal interest rate. There is a pre-approved borrowing limit and a tenure within which the borrower is required to pay off the loan.
Why choose unsecured over secured business loans
One of the biggest advantages of an unsecured SME business loan is that it can be obtained almost instantly with minimum paperwork. It only requires a valid proof of the business, its cash flow analysis and past credit history of the entrepreneur. Defaults (if any), do not put the assets of the businessman at risk. Further, unlike secured business loans, the owner of the business can file for bank ruptcy in the court and obtain a complete waiver of the loan.
Secured business loans require extensive paperwork and proofs, assets (movable or immovable) to be pledged, a good credit history and, a guarantor who can stand as a surety. The borrower is at a higher risk but can procure the loan at interest rates much lower than unsecured business loans. The lender takes the least risk and has the surety of recovering any dues by disposing of the assets pledged by the borrower. Defaults in case of secured business loans are not eligible for waivers in the court of law and result in loss of the pledged assets.
To sum up, secured business loans are for those who have assets to pledge, while unsecured quick business loans are for those who want instant funding and have no collateral to produce.
Businesses that can benefit from collateral-free loans
Small businesses usually start with small investments. After breaking even, these businesses grow and would need more working capital to sustain their growth. There are different types of small businesses that can benefit from collateral-free business loans.
A small business that has been around for more than a couple of years and has been doing well, can benefit immensely from term finance with low processing fee and little or no pre-closure fee.
The top beneficiaries of loans for business without security are suppliers to blue-chip companies. They can procure quick unsecured business funding to pay for pending orders that they are to fulfill shortly.
Distributors comprise a small business that purchases goods from suppliers. They too, can benefit from instant business loans. As they already have dedicated customers to cater to, they can avail the loan and settle the same at calculated intervals.
Retail merchants – both online and stores – can procure unsecured business funding to fund their cash flows, as most of the payments are received through card payments that are settled at the end of the month.
Get the documentation right
While banks and non-banking financial institutions require extensive documentation for processing small business loans online, there are private business loan providers that provide business loans without collateral to small businesses in India. The minimum documents required to process these loans are:
- KYC documents of the owner and promoters
- Business registration documents
- Current Account Bank Statements of the previous and current financial year
- Income Tax Returns from the last financial year
- Cash flow records of the last and current financial year
