Every business/venture starts with an idea! The idea: to provide the best/latest in the segment to the consumers. It can be a product, a service, information, an aggregation; whatever be the niche, the root idea always remains to provide the best while growing simultaneously. Normally the business grows as its customer base and its profit grows. This is the case most of the times, but what if you come with a next level idea which will help your business grow exponentially? Or what if you need to just expand your business but you do not have sufficient capital backup to do so. Going forward in such cases would require an additional capital pool, which might not be available at hand, so what are the options a business is left with? The best thing to do in such a scenario is to avail a loan to create a capital pool which then can be used to fund the required additional costs. These additional costs can be in form of employee’s salaries, additional tech and infrastructure and additional machinery.
To help the businesses expand, all the top lenders in the country, banks and NBFCs, provide business loan facility to the businesses as long as they satisfy the required eligibility criteria. Business loans can greatly help a business when they are in need of extra capital and rightly are the perfect tool for business expansion. The business loans provided are broadly of two kinds: secured business loans and unsecured business loans. Let us have a look at these two first.
Secured Business Loans
The business loans which have collateral attached to them, i.e. they are backed by an asset are called secured business loans. The collateral attached with the loan provides a recovery option to the lender should the borrowing business fail to repay the borrowed amount. The ownership of the collateral remains with the lender until the loan has been repaid in full and the loan account has been closed. This is done so that in the case of borrower turning NPA, the lender can sell the asset to recover its cost and minimize its losses. As such the lenders are ready to provide higher loan amounts at a lower interest rate, due to the minimization of the involved lending risk.
Unsecured Business Loans
Unlike the secured business loans, unsecured business loans are not backed by any asset and do not require the borrower to mortgage an asset to avail the loan. The business loan then is provided on the basis of the repayment capacity of the borrower and its credit worthiness. The unsecured business loans are also of shorter tenure so that the lender’s risk is minimized.
Here is a visual, side by side comparison of these two loans:
|Criteria||Secured Loans||Unsecured Loans|
|Collateral||Required, is a must||Not required|
|Interest Rates||Lower, since backed by asset||Comparatively higher|
|Amount||Higher, according to the value of the mortgaged asset||Comparatively lower, according to the repayment capacity|
How is the Unsecured Business Loan Helpful for Business Growth?
A comparison of the unsecured business loans and secured business loans show that the key difference between the two is an asset. In the case of secured loans, before the lender can approve the application and disburse the loan amount, first it has to be sure that the collateral being mortgaged is genuine and worthy of the repayment. To determine the value and finalize the process takes a longer time. Hence if the capital requirement is an urgent one, secured business loans are definitely not the right financial credit instrument to go for. Unsecured business loans on the contrary have lower disbursal time as the lender only needs to verify the repayment capacity of the applicant. Now let us understand in detail how unsecured business loans are a useful tool for business growth.
- No Collateral Required
As we now know already that unsecured business loans do not require the applicant to pledge any asset against the loan, hence no asset of the applicant is ever at risk, should it turn out to be NPA. If the business has a really good repayment capability, but lacks the required assets to pledge, this is the best option for them.
- Loan Amount Not Limited to Collateral Value
The loan amount that can be availed with a secured business loan is always tied to the value of the asset that is being mortgaged with the loan. This is great for well settled businesses which have enough assets to pledge, even if they do not have the repayment capability, but is equally opposite for the new businesses which do not have the assets to pledge but have a proven repayment capability. As such, even new businesses can avail higher loan amounts for their business expansion with an unsecured business loans.
- Quicker Processing
The processing of loan application for an unsecured business loans involves the following broad steps.
- Receive the completed application form along with all the required documents.
- Verify the KYC details of the owner(s) of the business.
- Verify the creditworthiness of the owner(s) of the business.
- Verify the business related documents such as physical verification of the office, analysis of the business bank statements and audited account reports and the previous two ITR filings of the business.
- Based on the past records verify the creditworthiness and the repayment capability of the business.
- Inform the applicants of their final eligibility, and the attached interest rates, tenures and other important terms and conditions and additional fee and charges.
- Should the applicant agree, finish the loan processing and approve the loan amount and the disbursal method.
- Loan disbursal.
The secured business loans however have additional steps involved regarding the verification of the asset and its valuation. The approval of the loan regarding the requested loan amount and tenure will depend on the lender’s valuation of the asset. As such the process can take long to process. However, the processing of the unsecured business loans only takes 3-5 working days.
- Ideal Option for New Businesses
New businesses require quick funding to accelerate their growth. They can demonstrate and prove their repayment capability but cannot provide an asset, early in their establishment, to avail a loan. Hence unsecured business loans work best in their favour.
The Highlighting Features & Benefits of Unsecured Business Loans
Some banks and NBFCs offer unsecured business loans which are also called as term finance or business instalment loans. The benefits of these loans to businesses are as follows:
- One can avail a loan of ₹100,000 to ₹100,000,000 for any of their requirements.
- No hidden or additional charges are charged under these loans. Borrowers are required to pay only processing fee which is a maximum of 2% of the loan amount borrowed. Apart from this, there are no other charges including the foreclosure or part-prepayment charges.
- Some of the NBFCs use customized credit criteria while underwriting customers. The credit offer is tailored as per the borrower’s requirement.
- The loan is disbursed within 3-5 days working days.
- No collateral or security is required against the loan.
- One can apply easily for this loan through the online medium which reduces many hassles such as visiting banks again and again and standing in the long queues.
Unsecured business loans play a major part in the establishment and growth of a business. It’s a fact that long-term secured loans are essential for long-term finance, but short-term unsecured loans can help businesses meet their urgent and important requirements, which can result in their growth