A Handy Guide to Getting a Small Business Loan without Collateral in India

The business landscape in India is intensely competitive, making it essential to have the right injection of funds at the right time to survive and grow. And for that, getting a loan from an established financial institution makes more sense than using your savings, or approaching a local moneylender or your extended family. However, for small businesses or start-ups, it can be often challenging to avail of a secured business loan as they usually lack enough assets to pledge as collateral or guarantee. But that should not stop you from dreaming big as you can get a business loan without collateral if you meet the lender’s criteria and go about the process wisely. Read on to know more.

What is Great About Unsecured Business Loans?

• You do not need to offer any collateral

  This is the most obvious advantage of business loans without security since it means that you do not have to put any asset on the line and risk losing it in case of default. In the case of a secured loan, if you default on loan payments, the lender can take over the asset and sell it to recover the loan amount.

• Small businesses get a chance to grow

  The lack of assets does not stop small businesses from getting an unsecured business loan. As long as you have a decent credit history and can showcase your venture as profitable, you have a good chance of getting the loan. Also, since unsecured business loans have short tenures compared to secured business loans, a business can take small amounts of loans and repay them quickly to build their credit score. This helps them get a larger loan amount in future.

• Fast loan processing 

  Since no collateral is involved in the case of an unsecured business loan, the lender does not have to spend time going through related paperwork or confirming the legitimacy or worthiness of the collateral. Hence, processing and approval are faster. It is convenient for you, the borrower, as well, since not too many documents are required to apply for such loans.

• Flexible usage of funds

  One of the key benefits of getting a small business loan without collateral is the flexible usage of funds. Unlike most financing products that are available to fulfil specific needs, you can utilise the funds from a small business loan for any business purpose. The lending institutions do not ask you to furnish a detailed plan on how you are going to spend the funds. You can use this loan for purposes such as business expansion, paying staff salary, equipment purchase, investment in R&D units, and so on.

• Helps in building credit history

  If you have never taken a loan before but have adequate experience in your present business, a small business loan can help you improve your credit score. In the case of a first-time borrower, instead of your previous credit history, the lending institutions are more interested in your business financial numbers and business vintage. If your company is generating sufficient revenue, the lender easily grants you collateral-free business loans. Once you receive the funds in your account, start repaying your EMI on time to build your credit score and history.

• Minimum qualification criteria

  Even though the unsecured business loan is provided without putting up any business assets as collateral, the eligibility criteria are still not very stringent. To apply for an unsecured loan, you will need a few basic documents such as your PAN card, ID, address proof etc.

Also Read: Business Loan without Collateral: What are the Pros and Cons

What Is Not So Great?

• High rate of interest 

  Any financial institution faces a higher risk when they offer an unsecured business loan as compared to a secured one. This is because they do not have any collateral to sell in case the borrower defaults. So, they charge a higher than usual interest rate to cover themselves against the risk of default. However, if you have a profitable business and have a strong credit history, you may acquire a low-interest small business loan.

• Small loan amounts

  If you apply for a loan for a business without security, you can usually expect a small amount. This is again because of the risk involved for the lender. In the case of a secured loan, the loan amount disbursed is based on the value of the asset, and hence, can be a large one. This is not the case for an unsecured loan, which is why the lender approves a small amount, expecting quick repayment. The fund value of a small business loan with most of the financial institutions ranges from Rs 5 lakh to Rs 25 lakh.

• It can be tough to qualify

  In the absence of collateral, a financial institution will look at your credit score, business plans, financial statements, cash flow and other relevant metrics to gauge whether you are credit-worthy or not. This is the reason why getting an unsecured business loan for a new business can be tough as you have nothing much to show. A poor credit score or vague business plans can also negatively impact your chances of getting a loan.

Also Read: Is my Business Eligible for an Unsecured Business Loan?