Business Loan without Collateral: What are the Pros and Cons

Advantages of Small Unsecured Business Loans

1. Quick Approvals

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.

2. No Collateral Requirement

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.

3. Build Credit History

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.

4. Loan Amount is Not Linked to Any Asset Value

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.

5. Flexible Repayment Options

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.

6. Flexible Usage

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. 

7. No Sharing of Profits

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.

8. Multiple Loan Options

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.

9. Tax Benefits

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.

10. Working Capital Assistance

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  

Disadvantages of Loans for Small Business Without Security

While it is true that there are several benefits of unsecured business loans, they do have a few drawbacks:

1. Higher Interest Rates

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.

2. Requirement of Good Credit Score

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.

3. Need for Specific Documentation

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.

Things to Keep In Mind While Taking an Unsecured Loan

• Unsecured loans are processed more easily
• The funds are released into your account quickly
• There is greater flexibility
• Make sure you have a decent credit history and score
• Unsecured business loan rates are higher than for secured loans
• Check if the lender is offering flexible options for repayment
• Most unsecured business loans are offered for short terms
• You can avail of loans from Rs 5 lakh to Rs 25 lakh
• You can apply for an online business loan without collateral in minutes 

 
Unsecured business loans are most suited to small and medium businesses involved in manufacturing, wholesalers, B2B service providers, distributors or traders who want quick and hassle-free financing options for their business. Some financial institutions also offer such loans to new business ventures who have not yet acquired any assets to offer as collateral.

Also Read: What Are the Benefits of Unsecured Loans for Your Small Business

In Conclusion

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.
 
Disclaimer: This post was first published on 26 February 2021 and has been updated for the latest information, freshness, and accuracy.