Collateral is an assurance a loan lender gets from the borrower in the form of an asset which can be land, house, or machinery. Banks offer loans and in return, always ask for collateral as a way to mitigate the risk, in case a borrower fails to pay back the amount. The amount of loan which is sanctioned by the banks is directly proportional to the value of the collateral offered.
But small businesses can’t always afford to provide collateral which in turn makes them ineligible for an SME finance. But there’s a way out now, i.e. collateral-free business loans which are offered by Non-Banking Financial Companies (NBFCs). However, one must keep in mind a number of factors before applying for a business loan in India without security.
Documents which need to be furnished at the time of applying for these loans are:
- PAN card of the owners
- PAN of the company
- Account statement of the year
- Address proof for a business place as well as house
A collateral-free business loan is small in amount, and it is generally used just to boost the growth of small and medium-sized businesses (SMEs). So you must have prior knowledge of the following things before you apply for one:
- You should be aware of the cash flow projections of your business. That is, you should have a sound knowledge about how much funds you would require and how you will utilize them to in the coming years so that you can repay the business loan availed.
- Before applying for a loan, you should check the cash flow projections because failing to repay the loan amount in time will only affect the credit score which in turn will affect the chances to secure loans for business in the future.
- To obtain an unsecured business loan, your business should have a good credit score. A bad credit score does not mean that you’ll not get access to a business loan, but it would affect your credibility. Additionally, it would also lead you to avail business loans at a much higher rate of interest. On the other hand, a business owner can quickly increase his credit score by reducing the credit utilization ratio. Credit utilization ratio amounts up to about 30% to 35% of the credit amount that you can use. The ratio reflects the amount of debt business is carrying in relation to the amount of available credit.
- A business should have a solid plan with a strong base. A business plan generally includes business purpose, cash flow projections, a well-documented financial report, a source of generation of revenue, and the amount of profit they can generate once the business loan is sanctioned.
- A business should clearly state the purpose of the business loan and where the amount is going to be invested.
There are many benefits of applying for a collateral-free business loans:
- The first and foremost benefit is no dependency on a third party for the guarantee
- Very attractive and competitive interest rates
- Flexible duration of repayment of up to 24 months for a very small amount of loan of up to Rs. 5 lakhs
- One can use this to avail product development funding
- Very quick and hassle-free processing of applications, mostly within a few working days of application. Also, the application is online and don’t require the applicant to personally visit the lender.
Thus, a collateral-free business loan is literally a boon for SMEs and MSMEs in a country where getting a loan approved from the banks is a tedious process. A small business might not want to risk its property or assets, and this is where collateral-free loans have been so beneficial for them.
Sources of Unsecured Business Loans in India
When it comes to collateral-free business loans, there are plenty of lending options including informal sectors, online lenders, and NBFCs. NBFCs have been the most reliable and preferred option amongst these three options and have been able to attract many small businesses with its flexible policies and easy an fast loan approval process.
Collateral-free loans from NBFCs can be easily availed at a very low interest rate without going through a very complex and tedious process. The process of getting a loan from an NBFC is as easy as using an App while sitting at home. The whole application procedure takes a maximum time of a few working days, which is very generous for the borrowers who don’t want to waste months of their time on getting a loan sanctioned. NBFC business loans also have no prepayment charges after the payment of 6 EMIs which traditionally banks do. This helps the borrower to save some money in the process of repayment.