Many Indian businesses consider taking corporate loans in their quest to expand their operations, develop infrastructure, or manage working capital. Nonetheless, selecting the right unsecured business loans as well as a suitable interest rate for the loan can significantly affect a business’s financial health in the long run. Consequently, entrepreneurs must assess various options available so they do not experience financial distress or inhibited growth.
This article will outline what unsecured business loans are and how exactly they work, especially given India’s financial landscape.
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Understanding Unsecured Business Loans
Unsecured business loans are loans in which the borrower does not have to pledge an asset or collateral as security. For secured loans, if a borrower defaults on payments, the financial institution may repossess the assets. However, an unsecured loan relies on the borrower’s past payment records and ability to repay debts.
Right now, in India, an upward trend in unsecured business loans is being observed. These types of loans are becoming more popular with MSMEs, and new businesses on the rise. They are suitable because they are pliable and can be accessed so easily. They help businesses cover their operating and expanding costs and improve working capital without risking valuable assets.
How Do Unsecured Business Loans Work?
Prior to approving any unsecured business loan, lenders look into various factors. It is paramount to see how it is done through the following procedure:
Application and Documentation:
Borrowers must complete an application form and submit vital documents such as their PAN card number, Aadhaar Card number, income tax returns, etc.
Creditworthiness Assessment:
Financiers often check creditworthiness based on repayment patterns and turnover when evaluating loan requests. Those with high scores above 700 tend to have easy access.
Loan Approval and Disbursement:
If one meets all the requirements stated earlier, their application is reviewed positively, enabling them to access funds immediately. On average, this takes three to seven days, making it perfect for individuals requiring quick cash for their ventures.
Repayment Schedule:
Generally, the EMI (Equated Monthly Installment) loan repayment system is employed over a fixed period, depending on some lenders who may consider cash flows for flexible alternatives.
Benefits of Unsecured Business Loans
There are several reasons why unsecured business loans are preferable over their conventional counterparts, especially for startups and small companies:
No Collateral Required:
One does not need to provide security for the loan, hence minimizing risk to the borrower’s financial position.
Faster Approval Process:
Since no collateral evaluation is needed, loan applications usually happen within a week.
Flexible Usage:
Unsecured loans can be used for multiple business purposes, such as buying inventory, covering cash flow shortages or expanding your business.
Ideal for MSMEs and Startups:
Small businesses can access unsecured loans without putting their personal assets at risk.
Improves Credit Score:
Paying off the loan on time will increase the borrower’s credit score, thus enabling them to qualify for even bigger loans in future.
Eligibility Criteria for Unsecured Business Loans in India
Before disbursement, lenders have specific eligibility criteria which must be met for unsecured business loan approval, including:
- Age: When one reaches the maturity stage while still having an earning career ahead, he is between 21 and 65 in the minimum years he has spent in full-time employment.
- Business Vintage: Typically, businesses should have been running for at least 1-2 years and have demonstrated a stable revenue stream.
- Annual Turnover: The annual turnover may be as low as Rs 10-15 lakhs according to different lenders.
- Credit Score: Possession of a CIBIL score that’s 700 and above increases one’s chances of getting approval.
- IT Returns: Last two to three years IT return statements.
Factors Determining Interest Rates:
- Loan Amount: The higher the amount, the lower the interest rate.
- Credit Score: Financial institutions tend to offer better loan terms to businesses with credit scores of 750 or above.
- Loan Tenure: Rates may be slightly higher over extended periods, but EMIs will be lowly priced.
Use a tax saving calculator to estimate potential savings and the impact of loan interest on your business’s tax liability.
The Bottom Line
In India, unsecured business loans offer a lifeline to businesses which have no security for borrowing yet require instant funds for expansion. They have been considered ideal alternatives for small and medium businesses or startups because they are fast, hassle-free and adaptable. However, to apply for this kind of financing, it is important to evaluate your financial situation first, including your ability to repay the debt.
Moreover, a tax saving calculator should enable businesses to thrive with minimal financial constraints, taking various factors into account.
