Business loans are a financial product that helps the business owners to meet their financial requirements. With a loan, the business owners can finance their equipment expenses, working capital, and other such essential requirements. He can also meet his other requirements such as payroll, bills, renovation, marketing budget, etc.
Indeed a business loan is very helpful for a business owner. But, when he decides to avail a loan, he faces the dilemma of choosing between a secured or unsecured business loan.
A secured loan is where he needs to hypothecate security with the lender. Secured loans bring a sense of security to the lenders as in the case of loan default; they can sell off the hypothecated property to recover their losses. However, the borrower has to put his asset at risk.
On the other hand, for an unsecured loan, he doesn’t need to require hypothecation of security. He doesn’t require to risk his asset or property. Due to this very feature, most small business owners like to avail unsecured business loans as they generally don’t have security to hypothecate with the lender.
So, let’s take a look at the pros and cons of unsecured or collateral-free business loans.
Pros of Unsecured Loans
- No Collateral: to avail an unsecured loan, you don’t have to pledge any security or guarantee. It gives you easy access to funds without risking any asset. Besides, there is no need for any guarantor either. Now, that you have not hypothecated to the lender, it will not lead to property seizure either.
- Faster Approval: when you avail a secured loan, the lender spends some time to evaluate the value of the asset to determine the loan amount. Since you don’t pledge collateral, this time is saved. Consequently, the loan process is sped up. Besides, there is also one news that NBFCs approve and disburse business loans in less than three days.
- Building Credit History: if you want to improve/build your credit history, availing an unsecured loan is undoubtedly the best way. During the expansion phase, your business may require more significant funds. All loan lenders check your credit history before availing a loan and are unwilling to grant a loan to offer loan to borrowers who don’t have any credit history. After availing a loan, you just need to ensure the timely payments of EMIs.
- Flexible Repayment Options: mostly, unsecured loans are offered by NBFCs as they are willing to take the risk. And NBFCs offer flexible repayment options. You can choose the repayment schedule that suits your business financials the best. This will also save you from the penalty that you may have to pay because of late payment of EMIs.
Cons of Unsecured Loans
- Credit Score: since there is no collateral required for unsecured loans, the lenders check your credit score. So, the credit score should be high. Having said that, NBFCs grant a loan to borrowers with a credit score of 600 or high.
- Interest Rate: unsecured loans are a bit risky for the borrowers as there is no security is pledged to save the borrowers in case of default. Therefore, the interest rates for unsecured loans are a bit high. However, NBFCs offer collateral-free loans at very competitive interest rates.
- Documentation: although there is no need to provide asset papers at the time of availing loans, a few other documents are still required. The lenders require a list of documents to check the eligibility of the borrowers. NBFCs need minimal documentation to process the application. These documents include PAN card, GST statement, house and office address proof, and bank statement.
It is very important to know all the advantages and disadvantages of unsecured business loans before availing them. And now that we have explained in length all the pros and cons, you can make a sound decision. The points mentioned above clearly state that a business loan without collateral is very beneficial and the best lender for it can be NBFC.
ZipLoan also offers unsecured business loans to small business owners ranging from Rs. 1 lakh to Rs. 7.5 lakhs. ZipLoan is an RBI registered NBFC that offers loans at minimal documentation and easy to meet eligibility criteria. Besides, its entire loan application is online, and the borrower can easily apply for the loan and submit the documents online from the comfort of his house or office. The small business loan approved and disbursed within the three days of documents submission in most of the cases.
The company also has a mobile application, ZipLoan Borrower’s App that you can easily download from the Google Play Store and apply for a loan. The application also reminds you of the upcoming EMIs, and you can pay the EMI through the App only. You can also upload the soft copies of the business loan documents online and download the loan closure from the App.