There are two types of business loans– business loan without collateral and with collateral. The business loans with collateral or secured loans require security hypothecation from the borrower. Whereas the business loans without collateral or unsecured business loans don’t require security hypothecation. While big and established business owners can provide security, it is often seen that the small business owners don’t have security to offer. Therefore, a collateral-free business loan is the ideal financial product for them.
Let’s take a look at the five options where a business owner can avail a business loan without collateral.
The equity capital is the portion of the business’s capital. It is raised in exchange for the share of ownership. The exchanged shares are called equity shares. Notably, the equity shareholders are the owners of the company. They have control over the management of the business. They bear the risk of ownership, and in return, enjoy the rewards. This type of business financing is also called share capital or equity financing.
Crowdfunding has become a common source of funding in recent years. Many entrepreneurs have established their business through crowdfunding. Crowdfunding is a platform where individuals raise funds through their social network. In a nutshell, the individual raises money for his small business from a large number of peoples (thus crowd), usually via the internet. It is a form of alternative finance and crowdsourcing.
Ask a Family or Friend
A business owner can also get finances from a friend or family member as well. But it will depend on the relationship or bond that the two share. However, mixing business and friends or family does not always work. It can also create bad blood between the two. So, when going this way, it is recommended to create a legal notice that is to be signed between the two parties.
MUDRA loan (Micro Units Development & Refinance Agency Ltd.) is a government loan scheme. Under this scheme, an entrepreneur can avail a credit of up to Rs. 10 lakhs. Launched on 8th April 2015, the scheme has sanctioned more than four crore loans of a total amount of Rs. 2.5 lakh crore, as of FY 2017-18. There are three loan products under this scheme- Shishu (loan of up to Rs. 50,000), Kishor (from Rs. 50,000 to Rs. 5 lakh), and Tarun (from Rs. 5 lakh to Rs. 10 lakh.
Non-banking Financial Company
NBFCs are the financial companies which are registered under RBI. These companies offer financial assistance to business owners in need. Their prime objective is to provide funds to small businesses. They offer business loans without security. Also, they have an online application process wherein the application can be filled online. And the documents can be uploaded online. Besides, they also have basic eligibility criteria and minimal documentation requirement.
A business owner can avail a business loan without collateral from any of the above mentioned five options. He needs to weigh the pros and cons of each option and choose the one that best suits him and his business.