What are Unsecured Business Loans?
There are several types of business loans, but majorly the two types are secured and unsecured business loans. Banks or financial lenders issue secured business loans in exchange for the loan taker’s pledging of their collateral or assets like land, property, stocks, bonds, and the like. In unsecured business loans, lenders or financial institutions do not require the pledging of any collateral. But instead, they look at the loaner’s credit history and repayment capacity to issue the loan. An unsecured business loan is an easier way of securing capital when you do not have any tangible assets, but it comes with its prerequisites. Read on to know the features of an unsecured business loan and whether you should opt for it.
What is unsecured business loan?
An unsecured business loan is a business loan given without any collateral in exchange. Here, the lender or bank relies on the loan applicant’s creditworthiness and repayment capacity. Sometimes, if the applicant cannot establish their creditworthiness or stability of income, the bank or lender might require personal collateral in exchange for issuing the unsecured business loan. Any company, firm, or individual can take an unsecured business loan for various reasons, that include:
- Upgrading business inventory
- Buying new equipment/ machinery
- Expanding operations to new regions
- Building infrastructure/ business premises
- Boosting working capital requirements
- Purchasing stocks/ assets
Generally, an unsecured business loan is available for micro and small enterprises. However, the bank or lender can even grant loans to companies, businesses, self-employed individuals, and anyone else they deem fit.
Additional Read: Different Types Of Business Loans
What are the features of an unsecured business loan?
The highlight of an unsecured business loan is that there is no requirement for any collateral for security. For small and medium businesses, and even for start-ups, it provides a great anchor and opportunity to grow their business/ profession without the need of pledging any asset. There is no need to struggle with unsecured business loans.
Instant/ Easier approval:
Unsecured business loans are approved a lot faster than secured business loans as there is no collateral required. There is minimal documentation involved, and funds are disbursed quicker. However, most unsecured business loans provide small amounts to the borrower, but banks like ICICI Direct go the extra mile and provide an amount of up to Rs. 2 crores.
For the applicant, an unsecured business loan is less risky but for the lender, it carries more risk. As there is no collateral involved and the bank has to rely on your creditworthiness, there is always a possibility of default. To negate this risk, banks charge higher interest rates than secured business loans. However, the repayment tenures offered are flexible and convenient, depending on the bank.
What are the eligibility criteria for an unsecured business loan?
To get approval for an unsecured business loan, you must have:
- A stable income
- 3-5 years since your business establishment
- A good credit history
- Minimum profits/ turnover as specified
- Some personal collateral, if required
- Minimum age of 28 years and maximum age of 65 years
- Any other requisites specified by the bank
You also need the necessary documentation:
- Profit and loss statements
- Balance sheets
- Cash flow statements
- Tax audit reports
- Current year performance report
- Projected turnover on company/ business letterhead
- Income tax returns for one year
- Proof of establishment
- Address and identity proof (Aadhar/ PAN Card)
- Any other documents requested by the bank
You might also have to maintain an existing relationship with the bank in question, such as having a savings/ current account or must have taken a loan previously.
Additional Read: Questions About Loan Against Property Answered
To sum it up:
Unsecured business loans are a great way of securing immediate capital for your business needs. You can give wings to your dreams and help your business reach unscaled heights with them. However, you must always check the terms and conditions attached with an unsecured business loan before you apply for it and seal the deal.
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