One of the most significant challenges that small businesses face while securing funding via loans is finalizing the necessary capital for growth. This can include procuring the right capital inventory or covering operational costs. This is where unsecured business loans can help. These loans have gained significant traction amongst small enterprises as they don’t require any collateral resulting in lower risks associated with them.
Let’s explore the advantages of these business loans for small businesses in India and look at some tips to gain the most benefits out of them.
Table of Contents
1. Collateral Is Not Needed
One of the major advantages of unsecured business loans is that they do not require collateral as security from you. For a small business owner, this changes everything. Most companies do not have valuable things like land or expensive machines and thus they cannot access traditional credit facilities that demand security. No collateral means lower risks involved in securing unsecured loan products and startup firms or microenterprises get easy access to capital. Thus, they can focus on growth and expansion readily.
2. Fast Approval and Disbursement
Time is crucial in business and a long time for processing or loan approval will definitely lead to missed opportunities while one waits for weeks, awaiting approval of loans in the business sector. It is common to find that these business loans, particularly those that come through online lenders, are approved and processed more quickly and more swiftly.
Sometimes, the loan takes only 24 to 48 hours to get approved and can save your life when you instantly need capital for purchases like inventory or unexpected necessities management within the organization.
3. Flexible Use
Unsecured business loans enable small businesses to utilize them for various uses, unlike specific credits such as equipment finance or home loans. They are perfect for managing day-to-day operations which may include salary payments, rent payments and paying suppliers among others. One can open another branch, employ more workers or bring in new stock — unsecured loans have no restrictions.
4. Retains Ownership
Most small business owners fear giving up equity and control over their company when seeking financing solutions. Venture capital or angel investing typically requires some amount of ownership to be relinquished by the business for funding. Having these kinds of loans you don’t lose your portion ownership and you retain all control over the decision-making process while also receiving the monetary aid required for your business’ growth. These provide enough money for you to grow your business without necessarily borrowing from external sources.
5. Less Stringent Eligibility Criterion
Generally speaking, unsecured loans have less strict qualifying conditions compared to their counterparts. However, banks and other financial institutions may still review applicants’ financial records and credit scores to ascertain their creditworthiness although this may allow many small business entities to access them since they lack assets that can act as security.
Start-ups with few assets, new companies or even individual businessmen and women whose credit score is not very good can all benefit from this form of borrowing. Several online lenders in India offer financial services meant for the SMEs only and they come in different plans that will suit any businessperson.
6. Tax Advantages
These business loans are not directly tax deductible but one can claim the interest paid on these loans as an expense in the business. This is a great help when trying to manage the level of taxable income for your firm. Small businesses can save by deducting the interest they pay on these loans in their returns, thus reducing their taxable income. To know more about these figures, one can also make use of an online tax calculator – a tool that can come very much in handy to help you calculate your taxable income.
Things One Should Know Before Applying
- Higher rates of interest: Because lenders are taking more risks by lending money without any collateral security, unsecured business loans typically have higher interest rates compared to secured loans.
- Loan amount limits: The lack of collateral may lead to a smaller loan amount. Ensure that different types of financial requirements are accommodated within this single loan.
- Shorter repayment period: Small businesses take time to make money and turn a profit but other loans such as unsecured ones require loan repayments within a short period of time. Thus, businesses need to be prepared so as to avoid disruptions in their cash flow.
The Bottom Line
For small entrepreneurs, unsecured business loans offer an opportunity to raise quick funds since there is no collateral involved. In addition to this, they are easily accessible, maintain ownership and have fewer constraints for eligibility, hence making them appropriate for early-stage companies and small businesses seeking growth without much to offer as collateral. Nevertheless, one should be aware of the high interest rates and shorter repayment durations that come with this kind of venture.
To know more about the details and the exact figures of the repayment plan for the loan, a small business owner may use an online tax calculator. Thus, by carefully considering these factors, businesses can make informed decisions about their funding options.
