What is meant by an unsecured business loan?
Business capital is a vital prerequisite to start a new business or help sustain business growth. Small businesses can function smoothly by keeping the money flowing with swift and efficient small business loans. Opting for traditional financial institutions like banks is often not much useful. This is because the banks ask for collateral security from the borrower, followed by a time-consuming process of loan processing. These loans are called secured business loans.
However, in most cases, the borrower may not be in possession of any assets to pledge as collateral. It is in these circumstances; small businesses reach out for unsecured business loans or collateral-free loans. Unsecured business loans are easily available funds that can be procured by entrepreneurs without the obligation to pledge any assets.
An easy way to explain this is by taking the example of a credit card. The credit card company analyses the borrower’s credit history and provides a personal loan at an increased interest rate. A pre-approved borrowing limit is set and the tenure within which the borrower is expected to pay off the loan is intimated to the customer.
Advantages of unsecured business loans over normal business loans
One of the greatest benefits of an unsecured small business loan is that it can be obtained instantly without the hassle of lengthy paperwork. It only requires legitimate proof of business, cash flow analysis statements and the previous credit history of the borrower.
• There is always business uncertainty and companies may face defaults. Such defaults do not have a negative effect on the assets of the borrower. Further, unlike secured small business loans, the business owner can file for bankruptcy in a court of law and obtain a total waiver of the loan.
• Secure business loans come with extensive paperwork and different kinds of eligibility requirements. There should be a good credit history and a guarantor should be available to stand surety. The financial institution has your assets as surety to recover the entire loan amount with accrued interest by liquidation and auctioning off the property.
• Secured business loans are for those individuals who have the necessary assets. Unsecured business loans are an amazing funding opportunity for those who need immediate funds to start and grow their business without collateral. Many entrepreneurs face obstacles in finding bank funding for their start-ups.
• Unsecured business loans do not ask for collateral, which results in an immediate loan approval. This helps the business owners to derive maximum benefits from favourable market conditions.
• In modern competitive markets, access to capital is the key to achieve success. The ability to scale your company is accomplished through an unsecured business loan. Entrepreneurs can save their valuable intellectual resources towards business development and save precious time by signing up for an unsecured business loan.
• A secured business loan is protected with your mortgaged assets. If you default, the bank would be able to take control of the property and has legal protection too. In an unsecured small business loan, the lender has the option to go to the courts. This process can be avoided by the business owner by filing for bankruptcy. According to the law, the courts are obligated to discharge the unsecured loan in case of insolvency.
• The total application process is streamlined, and funds are made available as soon as 24 hours. Many businesses who seek urgent financing opt for unsecured small businesses to scale up their business. Business owners find small business loans as an exceptional opportunity to avoid resource crunch and make the business profitable in the long term.
What businesses can benefit from collateral-free loans?
Small businesses usually start with minimal investments. After achieving marginal profits, these businesses adopt a growth plan. There will be an immediate need for working capital to keep the growth curve stable. In developing economies, there is a huge demand for collateral-free business loans among small enterprises.
• Any small business which has been established more than two years ago and which is showing positive results in business parameters can immeasurably benefit from small business loans, also known as term financing. This term finance option comes with a low processing fee and the nominal pre-closure fee, which makes it an attractive and worthy choice among small business entrepreneurs.
• The top beneficiaries of small business loans without security are the suppliers to blue-chip companies. These suppliers take good advantage of quick unsecured business funding by paying pending orders that will be fulfilled within a short gap of time.
• Distributors are small businesses that purchase goods from the supplier. Instant business loans are an amazing opportunity for distributors to expand their businesses. Distributors have a dedicated customer base and solid financial flows, which helps them unsecured business loans in a secure and comfortable manner.
• Retail merchants –both brick-mortar and online- can apply for small business loans to increase their cash flows, as most of their payment receipts are electronic and the cash cycle is settled at the end of the month.
Documentation is the Key
Banks and other financial institutions demand cumbersome documentation for processing small SME loans. The paperwork is made much simpler and transparent when applying for a private unsecured business loan in India. The documents required for business loan are:
• KYC documentation of the business owner and promoters
• Enterprise registration documents
• Bank financial statements of the current and the previous financial year
• Income Tax Returns starting from the last financial year
• Cash flow statements of the company of the last and current financial year.
Unsecured business loans offer immediate funding option
Every small business is looking for an opportunity to add to its working capital levels. Unsecured business loans are preferred due to their streamlined application process and lower risks for the borrower. Borrowers need to analyse their financial requirements and weigh the pros and cons of both secured and unsecured small business loans.