Running a business or growing a business needs funds. Whether it is about hiring more employees, buying more equipment, leasing more space or simply paying the rent, salaries, stock, marketing etc. every business needs a rapid inflow of capital. So, how do businesses get access to quick funds? For small and medium business owners, a common practice is to opt for an unsecured business loan. So, should you take a collateral-free business loan? Let us weigh in on the pros and cons.
An unsecured loan for business is simply a business loan without collateral, meaning that the lender advances funds without getting any security or asset (like property, gold, or vehicle).
A collateral-free loan for new business is what helps businesses get started as it provides the funds for the working capital, equipment, furniture, décor, marketing, paying salaries, leasing premises, digitising the business, and so on. Understanding how collateral loans work can also be valuable, as this type of loan may offer more security for lenders and potentially lower interest rates for businesses with valuable assets.
However, some guarantees of repayment of business loans without security will need to be given through other means. The lender may ask for a personal guarantee such as the owner personally guarantees on paper to repay the loan amount taken for the business.
Now that you have got an idea of what an unsecured business loan is, check out the pros and cons of it, and see if you fit the bill as a business owner to avail a business loan.
Also Read: Know About the Application Process of Unsecured Business Loan
As there is no need to evaluate any asset, unsecured loans are usually processed faster, and the funds are disbursed quickly, usually within one or two days. Documentation is also not as exhaustive as for a secured loan. The lender just has to be sure that you are a legitimate business. This means that you can get your business up and running quickly, instead of waiting and fretting about funds.
Obviously, this is the biggest advantage for you. As a business owner, you do not have to risk your property, gold, vehicle, or any other asset to raise funds. As such, a short-term loan without collateral is very advantageous for a small or medium business owner. You can start earning better and begin to repay the loan amount. When you take an unsecured business loan no mortgage is payable, which means that there is no risk of losing the property, and you are also free to make any renovations or improvements you feel fit.
When you repay your loan instalments in time, it can help you build your credit history. This means that any loan applications you make in the future will be viewed more favourably, and you will be able to get loans easily. If in the past you have availed a personal loan without security, and have repaid it in full in time, or are repaying it every month, it will help you with the unsecured business loan as well.
The amount of the loan does not depend on the value of any asset you have, as you are not giving any as collateral. You can borrow the amount you need for the business, depending on a few factors such as your creditworthiness, and the upper limit offered by the lender. Also, remember that in a secured loan, you will not get the full value of the asset as a loan. Usually, the lender will only advance to you a certain percentage of the asset’s market value.
Financial institutions often offer businesses flexible repayment schedules, so that you can choose the one most suited for your requirement, and as per your ability. This way you can avoid fines due to missing or delayed instalment payments. To know the monthly instalment amount, you can simply enter the desired loan amount and repayment schedule in the unsecured business loan calculator.
One of the main advantages is the option to use business loans without collateral security in a variety of ways. You can allocate the funds towards numerous business purposes. Some of the areas where the funds can be utilised include business expansion, raw material purchase, paying staff salaries, and more. The financial institution does not ask you to state a reason for why you are seeking a business loan non-collateral.
There are numerous options through which businesses can raise funds. As a business owner, you may raise funds from private investors, venture capitalists, equity financing etc. However, you must give them a stake in your company as part of the financial transaction. Once you give them a stake, they have the right to participate in business operations based on their percentage. Equity financiers are also involved in business decisions and sharing of profits. But when you ask for a business loan without collateral, you have complete control over your company's operations and profitability.
One of the biggest advantages of a business loan without collateral is its availability in customised form. You can obtain different types of business financing that are tailored to meet your specific business needs. Some of the most common forms of business loans are term loans, working capital loans, line of credit, and a few others. However, keep in mind that different business loans have distinct features and interest rates.
Business loans without collateral security also come with tax benefits. The interest that you would be paying towards loan repayment is subject to a tax deduction. To qualify for these benefits, you must include the interest payment in your books' expenditures column.
Another major advantage of a business loan without collateral is immediate working capital assistance. The need for finances to meet operational expenses is a regular occurrence. As a result, if you don't have simple access to finances, your firm may suffer.
Also Read: Is an unsecured loan the right option to fund the growth of your business
While it is true that there are several benefits of unsecured business loans, they do have a few drawbacks:
The biggest disadvantage of an unsecured business loan is the rate of interest, which is usually higher than that of a secured loan. As the risk is greater for the lender, they charge higher rates of interest to cover any contingency.
For unsecured business loan eligibility, one needs to ensure a good credit score. As you are not offering any collateral, the financial institution will be very interested in your credit history, and your ability to handle various types of debt. They will make intensive scrutiny of your credit history, your regularity in paying off credit card bills and loan instalments, and so on, for the past few years.
Even though there is not much documentation involved in getting an unsecured business loan, lending institutions will ask to see many documents such as licences, registration certificates, bank account statements, rent or lease contracts, audited profit and loss statements and balance sheets, GST returns, list of existing loans, PAN card, KYC documents, and so on.
As a business owner, avoiding long queues for your loan application is crucial. To streamline this process, we have simplified our online business loan application. Follow the steps below to apply.
Also Read: What Are the Benefits of Unsecured Loans for Your Small Business
An unsecured business loan offers an easy and quick way for businesses that need funds urgently to infuse their business with new funding. This can be used to expand the business, renovate premises, purchase new equipment, enhance stocks, or anything else. As long as the borrower has an excellent credit reputation, the lending institution will have no problems in advancing the amount without asking for a physical asset as security.
However, the borrower must be sure that they will be able to repay the amount as per the schedule and that there is an urgent need.
An unsecured loan can be very beneficial to the business owner as they can resolve their immediate requirements.
Why should I consider a collateral-free business loan?
Collateral-free business loans provide quick access to funds without risking your assets. They are ideal for businesses needing immediate capital for various purposes such as expansion, inventory, payroll, and more.
Who is eligible for an unsecured business loan?
Typically, SMEs with at least 5 years of operational experience and a positive financial track record are eligible. Lenders may also require a good credit score and documentation supporting business stability.
Is an unsecured business loan suitable for new businesses?
Yes, new businesses without substantial assets can also apply for unsecured loans to fund initial operations, marketing, and other startup expenses.
Can I get tax benefits with an unsecured business loan?
Yes, interest paid on business loans is typically tax-deductible. Consult with a tax advisor to understand specific benefits applicable to your situation.
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Hero Fincorp offers a wide range of financial products including Personal Loans for personal needs, Business Loans to support business growth, Used Car Loans for purchasing pre-owned vehicles, Two-Wheeler Loans for bike financing, and Loan Against Property for leveraging real estate assets. We provide tailored solutions with quick processing, minimal paperwork, and flexible repayment options for smooth and convenient borrowing experience.