Getting the right amount of funding at the right time is very crucial to a small business. Small-scale manufacturing and service sectors require ongoing financial support to meet their working capital needs and long-term asset purchase objectives. The primary role of banks and financial institutions in India is to provide them with adequate credit, known as business loans. They must have access to financial help to meet their working capital and investment requirements.

Small businesses have numerous capital requirements, including raw material procurement, transportation of raw materials and completed items, power and water use, machinery and equipment, land and buildings, and so on. 

Small business entrepreneurs can obtain term loans, working capital loans, or MSME loans to meet their capital requirements. However, these loans require the business to be profit-making or have a good credit standing. They may also ask for considerable collateral if the loan amount is very high. That is where ‘Unsecured Business Loans’ come into the picture. 

Unsecured business loans are easily accessible and come with numerous benefits like nil collateral, government subsidy, low-interest rates and high-loan amounts of up to Rs.50 lakhs.

What Is An Unsecured Loan? Who Can Avail An Unsecured Loan?

An Unsecured Business Loan is based purely on the creditworthiness of the business borrower, as determined by income, financial papers, and other relevant factors. Collaterals or guarantees are not considered for this loan. 

An unsecured business loan is also flexible. These unsecured loans are beneficial to many small business enterprises and startups in India. They are handy for various purposes that include business expansion, equipment purchases, inventory management, and cash flow management.

Key Benefits Of Getting An Unsecured Loan For Your Small Business

1. Nil Collateral

Nil collateral is one of the primary benefits of getting an unsecured loan. These loans processed without any collateral acts as a great boon for small-scale businesses. It is useful when they are in their nascent stage and have not yet acquired any primary assets.

Many firms require collateral. For instance, a startup may not have any substantial business assets to provide as security to lenders. As a result, the startup would be unqualified for most secured business loans. When evaluating a business, various factors such as business plans and market potential play a pivotal role.

Since you would not be putting up any collateral, the lender may ask for a personal guarantee before approving you for an unsecured loan. It acts as your legal document, indicating that if you fail to repay the debt, the lender will be able to seize your assets.

2. Streamlining the loan application process

Because the documentation process is minimal and quick, it is simple to apply for a business loan online. Since there is no collateral, the time spent evaluating assets is reduced, and the distribution procedure is simplified.

The application process for a company loan might be lengthy. Financial institutions look to ensure that they fund companies that pay their bills on time and pay off their debts in full.

An unsecured business loan eliminates the need for collateral, allowing the lender to focus on other considerations such as credit rating, monthly sales, and operation time.

The quick provision of the funds is thanks to the short application process. In most cases, not more than 24 hours post the application submission. Hence, unsecured business loans are preferred by many businesses urgently seeking financial assistance.

3. Flexible usage of funds

Now, with traditional loans, you may not have the freedom to utilise the money you want. Most loans are provided based on your requirement, but not without an invoice or bill. Also, before you can get the loan, most banks want you to submit extensive business development proposal plans.

However, unsecured loans are different. You can utilise the funds from an unsecured company loan for whatever you like. There are many online instant loans where you don’t have to mention your intended use of the funds. It is entirely up to you whether you use it to hire additional staff, expand your business premises, conduct R&D, or for any other reason. This gives you more flexibility and allows you to use the funds for much-needed expenses. 

4. Suitable for first-time borrowers trying to build credit scores

It is a great way to develop credit if you are a first-time applicant with no credit history. Lenders are more interested in the profitability of your company than in your credit history. It is helpful to small business owners who have bad credit or none at all.

5. Minimum Qualification Criteria

Although the qualifying criteria for unsecured business loans are less rigorous, you may be required to establish a consistent monthly income. You will have to provide a financial statement of the last six to twelve months and your permanent account number (PAN). So, as long as you can provide these details, your chances of getting an unsecured loan are good.

6. Lesser Documentation

Since unsecured loans are purely based on your creditworthiness and not on the collateral you need to provide, banks will only ask for primary documents like bank account statements, business profit, and loss statements, reducing the applicant's documentation load.

Obtaining financial backing, capital to sustain an already established business, or funds for expansion can be a complicated aspect of running a business. An unsecured loan is simple to obtain, and the entire process is painless. The documentation requirements are minimal, and the loan amount is quickly disbursed. This can be useful if you are in immediate need of money.

FAQs of Benefits of Using Unsecured Business Loan

  1. Do banks check my credit score when processing an unsecured loan?

Yes, the bank definitely checks your credit score from approved credit reporting agencies in order to assess your creditworthiness when processing your unsecured loan application.

  1. Who all can apply for Unsecured Business Loans?
  • Sole Proprietorship
  • Partnerships
  • Private and Public Limited Companies
  1. What is the average rate of interest of Unsecured Business Loans?

The current average rate of interest on Unsecured Business Loans is between 8% and 22%. It is largely dependent on the business plan and the needs of the company.

  1. How much money can I borrow under an Unsecured Business loan?

Unsecured business loans are granted based on the needs of the business. Applicants can apply for Unsecured Business Loans ranging from Rs.50,000 to Rs.1 crore.

  1. Can Start-ups get Unsecured Business loans?

Unsecured business loans are typically granted to well-established businesses. The company should have been in operation for at least three years and made a profit for two years in a row. As a result, start-ups may have difficulty in getting Unsecured Business Loans unless they establish a stable income or they can offer personal guarantee.