Unsecured small business loans are those available without collateral. Here are their common types.
These are short-term loans that have been granted for 36 months. You may utilise the loan for any legitimate reason. Businesses often utilise this financing to create additional branches, market products, satisfy bulk orders, and so on.
The lender permits you to close this loan considerably before the loan conclusion, but only if you have successfully paid all of the EMIs for at least six months, beginning with the loan tenure.
This is another short-term loan that is payable within 36 months. You can apply for this credit to meet your day-to-day business operations. For example, you can use the funds to pay for office rent, stationary, and raw materials, settle your creditors’ invoices, and pay wages to temporary staff.
Working capital financing can either be secured or unsecured. The secured one is granted against the business inventories. The loan amount can go up to Rs 3.5 crores but might differ with some lenders.
An overdraft is a financing arrangement that allows you to withdraw the amount over and above your bank balance. It is a credit extension once your account balance reaches zero.
For example, suppose an emergency strikes your business, and you need immediate funding assistance of Rs 2,00,000, but your bank account has merely Rs 2,000. The lender can offer the required sum based on your transaction history and business creditworthiness.
The key feature of this best unsecured business loan is that you must pay interest only on the amount you withdraw and the overdraft limit you are approved for.
It is a revolving credit in which you can withdraw funds from your account up to the approved amount while paying interest only on the funds used and not approved. Another advantage is that as you pay your dues, the limit is restored to the amount paid.
This loan is ideal for meeting short-term needs such as paying wages, purchasing merchandise, and managing cash flow. To understand how it works, consider the following example.
Assume you run a clothing store. You will need inventory to fulfil the increasing demand for the next season. You apply for a line of credit and are accepted for Rs 50,000 at an 8% interest rate. However, you currently require Rs 20,000 to complete the transaction.
You sell some clothes and collect Rs 15,000, of which you pay Rs 10,000 as repayment. Your total available limit has been restored to Rs 40,000.
It is a financing instrument in which the bank guarantees the creditor (supply) that if you, the buyer, fail to make your payments, the bank will pay the amount owed.
The letter of credit specifies the conditions that must be met by the seller, such as presenting certain documents, before the payment is released. The bank levies a fee for issuing this unsecured business loan for new businesses, which can vary depending on the type, amount, and duration.
Business credit cards are financing instruments that allow you to make small expenditures for your business. You can use this card to buy stationery and pay utility bills, and some lenders even allow you to get cash with it.
If you pay your business card bill on time, you will not be charged interest. However, if the due date passes, the interest fee is 2-3% of the unpaid balance.
Due to the significant risk of recovery during default, unsecured business loans have slightly higher interest rates than secured financing. Here are some considerations lenders use when approving funds.
This is the paperwork issued by credit bureaus such as CIBIL and Equifax. It displays your total outstanding debts, EMI payment pattern, the number of loans you have applied for recently, and a few other details about your credit history. Based on these characteristics, credit bureaus assign you a three-digit number known as a credit score. The better this score, the lower your unsecured small business loan interest rate.
Even if your firm is operating well, having many loans may make it difficult to obtain financing. Suppose your company has an annual revenue of Rs 50,00,000 and a profit of Rs 15,00,000, resulting in a monthly profit of around Rs 1,25,000.
If your current loan EMI is Rs 90,000, your debt-to-income ratio is 0.72 (total EMI ÷ monthly earnings). In this instance, the lender believes the amount you have left will be insufficient to pay future debt commitments. Therefore, they will either reject your application or charge a high interest rate.
Always aim to keep your DTI ratio around 0.40 for speedy loan approval.
Lenders value businesses that provide in-demand products or services throughout the year. They favour companies that are unaffected by seasonal variations. For example, if you make woollen items, the lender may charge you a high-interest rate because your firm only thrives during the winter.
An unsecured business loan for new business does not require collateral, but if you are somewhat behind in meeting the lender’s standards, it is preferable to offer collateral. If you default, it will provide your lender additional protection because they can auction the asset and recover part of their losses.
Some of the common things you can use as collateral are:
Property papers of your office premises
Commercial vehicle registration certificate
Plant & machinery
You are mistaken if you believe your business expenses do not impact your loan eligibility.
If your business’s cash outflow significantly exceeds its inflow, you will be approved for a higher interest rate. Besides cash flow, the lender will review your balance sheet and profit-and-loss statement to guarantee that your firm is consistently profitable.
Unsecured business loans are credits that do not require collateral and can assist you in meeting various company needs. They are classified into different types, each with their own characteristics. The approval and interest rate for an unsecured business loan is determined by various factors, including your company’s credit report, debt-to-revenue ratio, business kind, and others.
