Unsecured Business Loans in India: Eligibility, Benefits, and How to Apply in 2024

Unsecured business loans offer a lifeline to entrepreneurs without requiring collateral, making them a versatile funding option. This guide will cover eligibility, required documents, interest rates, charges, features, benefits and the application process to secure an unsecured business loan in India. Whether you are a small business owner seeking growth capital or a startup founder in need of financial support, understanding unsecured business loans is crucial. Let us dive in and unravel everything you need to know about securing the best unsecured business loans. 

What is the Definition of Unsecured Business Loans?

An unsecured business loan is a type of loan that does not require collateral, which is valuable property used to secure the loan. If payments are not made on an unsecured loan, the lender does not have collateral to cover its losses, making this type of loan riskier for lenders. Hence, Unsecured business loans often have strict eligibility criteria due to the increased risk for the lender. 

Can You Explain How Unsecured Business Loans Work?

Unsecured business loans offer flexibility and convenience for businesses in need of financing, as they do not require collateral and can be obtained based on the business’s creditworthiness. His type of funding option is especially beneficial for small businesses and startups that may not have valuable assets to put up as collateral. Additionally, unsecured loans typically have a faster approval process and may be more accessible to businesses with strong credit histories. 

How They Work

Here's a breakdown of the unsecured business loan process:

• Application: You can start the process by applying to a lender, like a bank or online lender and submitting your business plan, financial statements and personal credit score. This is a crucial step in securing the funding for your business, as it provides the lender with the necessary information to assess your creditworthiness and the viability of your business. Make sure to prepare these documents carefully and accurately to present a strong case for your loan application. 
• Evaluation: The lender will carefully assess your application, giving particular attention to your creditworthiness. They will consider factors such as your business’s credit history, profitability, cash flow and your personal score as a business owner. 
• Approval and Loan Terms: Once the lender completes their assessment, they will determine whether to approve or deny your loan request. If approved, they will then outline the specific loan terms, such as interest rate, loan amount and repayment schedule for you to review and consider. 
• Repayment: This is a crucial responsibility that begins once you accept the loan terms. You will need to pay back the principal amount along with interest within the agreed timeframe to maintain a good credit history for your business. 

You may also read: Role of Business Loans in Fueling Business Growth in India 2024

What are the Benefits of Unsecured Business Loans?

Unsecured business loans or business loans without collateral offer a great opportunity for businesses to access funds without risking personal or business assets. This type of loan can be particularly advantageous due to - 

• Quick and easy online process with minimal documentation and formalities. No collateral or assessment of value is required. 
• It’s useful for sudden business emergencies where businesses can avail huge funds disbursed within hours to prevent disruptions. 
• It’s a feature of boosting credit scores when repaid in time, increasing future loan eligibility for business expansion. 
• The flexibility in availing and repaying unsecured business loans with convenient terms, including a dropline overdraft facility and the option to make part payments without penalties. 
• It is a safe option for new businesses without assets. 
• Your assets are not at risk and lenders do not have the right to recover the loan default by claiming the asset. 
• RBI’s lowered repo rates which created competition among banks for unsecured business loans with competitive interest rates.

Are There Any Disadvantages of Unsecured Business Loans?

Defaulting on unsecured business loans can have serious consequences for your business. Failing to meet the lender’s expectations could affect you in the following ways - 

• Your Liability is Important– Your liability is a serious commitment because you have to ensure repayment every month without fail, even though it is not backed by assets. Missing a repayment may not afford you many opportunities or flexibility for a second chance. 
• Extra Expenses – Unsecured business loans entail additional costs due to the higher risk involved for the lender. The exact increase in expenses depends on your credit rating and end-of-year financial statements. 
• Creating a Bad Image – Not managing loan repayments effectively can damage your reputation with lenders, making it harder to get credit in the future. Maintaining good repayments can enhance your lender relationship and improve your reputation. 
• The Ability to Adapt Easily – It can be both a benefit and a hindrance to your business. While a cash boost can provide support, it also means committing to pay it back over an agreed time, which could impact cash flows with higher monthly repayments. It is important to carefully weigh the short-term benefits against the long-term commitment when considering business flexibility. 
• Unsecured Debts Still Require Payments – Unsecured business loans still require repayment and if your business defaults, the lender may pursue legal action to collect the debt. Even though the loan is unsecured, the lender can still pursue you and your assets through the courts if they see fit. 
• Damage Personal Credit Score – Taking out an unsecured business loan could put your personal credit score in jeopardy, as the loan will be reflected on your personal credit report. If you are unable to meet the loan obligations and default, it could harm your personal credit score. 

How Can I Qualify for an Unsecured Business Loan?

To qualify for an unsecured business loan in India, you have to match the following eligibility criteria - 

• To be eligible for the loan, applicants must be at least 18 years old when applying and must not exceed 65 years of age at the time the loan matures. 
• Having a credit score of 750 or above is indicative of a strong credit history and can make you eligible for lower interest rates on loans and credit cards. 
• The business must have been established for at least one year and show signs of profitability. Additionally, it must have been operating from the same location for the past year. 
• Applicants must demonstrate a consistent stream of income, supported by recent salary slips. 
• The lender either needs your bank details or your bank statement for the past 6 months.

How to Successfully Apply for an Unsecured Business Loan in India?

When seeking unsecured business loans in India, entrepreneurs can quickly access funds without the need for collateral. However, securing approval for these loans requires a strategic approach. Understanding the process and taking the necessary steps can significantly increase your chances of success. 

1. Compare Lenders: When comparing lenders, it is essential to thoroughly research and compare offerings from various sources such as banks, NBFCs and online lenders. Pay close attention to factors like interest rates, loan amounts, processing fees and repayment terms to make an informed decision that suits your financial needs and goals. 
2. Check Eligibility: Utilize the eligibility checkers provided by lenders on their websites to get a preliminary idea of your chances of approval. 
3. Prepare Documentation: Please make sure to gather all relevant documents such as KYC proofs, business registration certificates and financial statements. All the documentation must be accurate and complete before submission. 
4. Craft a Compelling Application: When crafting your application, it is essential to clearly outline your business plan, including the loan purpose and repayment strategy. A compelling application should also emphasize the potential for growth and profitability in your business.
5. Negotiate Terms: When discussing terms, be assertive and do not be afraid to negotiate interest rates and associated fees. This is particularly important if you have a solid credit history and can demonstrate your creditworthiness. 

How to Develop a Strategy to Repay an Unsecured Business Loan?

Here are some smart strategies for effectively managing your unsecured business loan repayments and maintaining financial stability, leading to a strong and healthy business - 

1. Review loan terms, understand interest rates, repayment schedules and collateral. Be vigilant against potential fraud. 
2. Create a comprehensive budget outlining income expenses and loan repayments for informed decision-making and prioritizing repayments to avoid over-commitment. 
3. Make loan payments a top priority in your budget. Allocate a portion of your revenue towards loan repayment to meet your obligations promptly. Set up automatic transfers from your business account to streamline the process and avoid missed payments. 
4. Grow your revenue by expanding your customer base, offering more products and improving marketing for steady income and loan repayment. 
5. Review business expenses, cut costs without sacrificing quality, redirect savings to loan repayments and avoid spending aimlessly to prevent financial trouble. 
6. If you have financial difficulties, talk to your lender/s. They can help businesses in temporary hardships with modifications or payment extensions. 
7. Consult a financial advisor or accountant for guidance on loan repayments if you feel overwhelmed or unsure. They have the expertise to help with your unique situation. 

Conclusion

Unsecured business loans are viable for Indian entrepreneurs who want to grow their businesses without collateral. This guide provided the necessary information and steps to navigate the entire loan process, from eligibility requirements to preparing a strong application and creating a repayment plan. This knowledge allows you to effectively utilize unsecured business loans to drive your venture towards success. 

Frequently Asked Questions (FAQs)

Q: What is an unsecured business loan?

A: An unsecured business loan is a collateral-free financing option approved by lenders based on your business’s creditworthiness, financial history and potential. It does not require you to pledge any property or equipment as collateral. 

Q: How do I qualify for an unsecured business loan?

A: Qualifications required by lenders typically include a good credit history, a well-developed business plan and stable financials. 

Q: Are unsecured business loans right for my business?

A: Unsecured business loans are suitable for businesses in need of fast capital, such as startups with few assets, or established businesses with good credit. Nevertheless, it is important to carefully evaluate the higher interest rates and compare them to the advantages before applying. 

Q: How long does it take to get an unsecured business loan?

A: Unsecured business loans typically have a faster approval process compared to secured loans, with some lenders providing approvals within a few days. The timeline for approval can vary based on the lender and the complexity of the application, but in general, it is a quicker process. 

Q: Is my business idea eligible for an unsecured loan?

A: When approaching lenders, it is important to acknowledge that some may be cautious about high-risk ventures and focus on highlighting the profitability and clear repayment plan in your business proposal. Conducting thorough research to identify lenders who specialize in your specific industry can greatly increase your likelihood of securing funding. 

Q: Can I use personal assets as collateral to secure a better rate on an unsecured loan?

A: Unsecured loans are typically defined as loans that do not require collateral. However, certain lenders may take into account a borrower’s strong personal credit or assets as an indication of their financial stability, which could impact the interest rate offered. 

Q: I need funding for a specific business expense (e.g., inventory purchase). Can an unsecured loan be used for that?

A: Unsecured business loans provide businesses with flexibility for a range of needs, such as purchasing inventory, upgrading equipment, funding marketing campaigns or handling unexpected expenses. It is important to clearly state the intended use of funds in the loan application. 

Q: What happens if my business goes out of business before the loan is repaid?

A: The loan agreement and personal guarantees determine the outcome. In a best-case scenario, loan defaults lead to the liquidation of business assets to cover the outstanding amount. However, if a personal guarantee was given, you might be held personally responsible for repaying the remaining loan balance. 

Author: Abhik Das