What is a Business Loan Without Collateral?
Unsecured business loans are loans granted by financial institutions or banks to applicants without any collateral. These business loans can be used by startups to manage their business operations.
An unsecured business loan provides financial aid for businesses that do not have assets to use as collateral and need funds to expand. Banks and financial institutions evaluate applicants based on different criteria due to the unsecured nature of the loan. Unsecured business loans are granted based on the following factors:
- Income Range
- Financial Documents
- Credit Score
Unsecured Business Loans: Types
Banks and financial institutions provide a range of options for unsecured business loan to applicants based on their requirements and eligibility. Below are some of these loan types:
1. Term Loan
Term loans are provided to borrowers for a specific period. Before the loan is disbursed, the repayment period, interest rate, and any other charges are determined.
2. Working Capital Loan
Working capital loans are received by businesses to cover their short-term operating needs. These loans are based on the business’s regular expenses.
3. Bank Overdraft
Overdraft loans are a form of credit provided by banks that can be used as directed by the credit institution. Overdrafts allow customers to withdraw money that may exceed their account balance. Interest is only charged on the amount of credit used.
4. Government Scheme Loans
The Government of India has launched a variety of schemes that provide financial support to small or startup businesses. Small businesses are eligible for business loan with subsidized interest rates. Start-up schemes such as Stand-up India and the Prime Minister Employment Generation Program help new businesses achieve their goals.
5. Merchant Cash Advance
Merchant cash advances allow merchants to meet their short-term credit needs. This unsecured business loan is based on credit card sales. The loan amount is determined by the monthly credit card transactions made by the business.
6. Micro Loans
Microloans are offered to small businesses in less developed parts of the nation to meet urgent cash needs. This category includes loans, credit, savings accounts, money transfers, and insurance. Beneficiaries are those who do not have access to traditional financial resources. The amount provided under such schemes can range from ₹5,000 to a higher limit based on the business needs.
7. Business Credit Cards
You can also secure a loan for your business using a credit card. The credit limit of the card determines the loan amount.
Unsecured Business Loans: Features and Benefits
Unsecured business loans are popular financial products because they provide funds to the borrower without the need for collateral. Let’s look at the unique features of unsecured business loans:
- Collateral
The absence of collateral is one of the main characteristics of an unsecured loan. Collateral is typically used to secure the loan amount, and if the borrower fails to repay, they are classified as bad credit. - Interest Rate
A higher interest rate is charged by banks on unsecured business loans due to the increased risk associated with lending without collateral. - Tax Exemptions
Borrowers of unsecured business loans are not entitled to tax benefits, unlike borrowers of secured loans who may receive several tax exemptions. For example, home loans provide tax benefits, while unsecured business loans do not. - Loan Amount
Unsecured loans differ significantly from secured ones. When the borrower pledges collateral, the bank may provide a larger amount. However, for an unsecured loan, the amount is generally smaller, and the applicant’s credit rating is crucial. - Repayment Terms
Banks set shorter repayment terms for unsecured loans to minimize risk. Repayment periods can range from 3 months to 5 years, and the interest charged each month depends on the outstanding balance.
Eligibility Criteria for Unsecured Business Loans
Banks have different eligibility criteria for unsecured business loans. Below are the common eligibility requirements:
- Age
The applicant’s age must be between 18 and 65 years at the time of applying for the loan. - Credit Score
A minimum credit score of 750 is usually required. A high credit score gives the applicant leverage when negotiating interest rates on the loan. A lower credit score may result in a higher interest rate or rejection of the application. - Business Information
The business must have been operational for a minimum of five years to qualify for an unsecured loan. The business line should remain consistent. To ensure financial viability, the business must provide documents like balance sheets, tax computations, and profit and loss statements for the last two years. - Statement of Income
Applicants must present documents proving regular income. Salary slips and bank statements are acceptable for salaried employees, while self-employed individuals may provide their bank statements as repayment assurance.
Documents Required for an Unsecured Business Loan
To complete your application for a business loan, several documents are required by all credit institutions to sanction a business loan request. The following documents will be necessary:
- Photo identification proof
- Passport-sized photographs
- Signature and address proof
- Income proof
- Certificate of qualification for the applicant
- Bank statements
- Customer letter
- Limitation of overdraft as per bank statements
- Memorandum of Association (MOA) along with the incorporation certificate (in case of companies)
- Partnership deed
How to Apply for an Unsecured Business Loan
You can apply for an unsecured business loan by visiting your nearest branch or their website.
Step 1
Fill in all the required details on the application form, including:
- Desired loan amount
- Employment status
- Annual gross sales
- Years of business existence
- Contact details
- Collateral type (if applicable)
Step 2
The applicant should provide additional information about their business, including:
- Type of company
- Business and industry
- Bank statements
- Gross profit
- Existing credit or EMIs
- Applicant details: full name, age, gender, date of birth, residential pincode, email address, PAN card
Step 3
After submitting all the required information, a representative from the bank will contact you to assess your application. The sanctioned loan amount will then be deposited into the bank account specified by the applicant.
Conclusion
Unsecured loans for business are a great option for small business owners and entrepreneurs who do not have collateral. Businesses can choose from a variety of loan options, including term loans, government schemes and working capital loans.
These loans are a quick way to access funds, but applicants must meet the eligibility criteria and provide the necessary documentation. A good credit rating and a strong business plan will increase your chances of getting a loan with favorable terms.
Understanding the features, benefits and application process for unsecured business loan empowers entrepreneurs to make financial decisions that will lead them to success and growth.
