Benefits of Taking a Collateral-Free Business Loan

Collateral is the assurance a lender gets from the borrower in the form of an asset which may include land, house, machinery, etc. Banks offering loans always ask for collateral as a way to mitigate the risk in case the borrower fails to pay back the amount. The amount of loan sanctioned by the banks is proportional to the value of the collateral hypothecated. But small businesses can’t always afford to provide a collateral which in turn makes them ineligible for SME finance. But there’s a way out now - “Collateral free Business Loans” offered by Non-Banking Financial companies (NBFCs). However, one must know the number of factors before applying for an unsecured business loan.

Documents which need to be furnished at the time of applying for these loans are:

You should be aware of the cash flow projections, i.e. should have a sound understanding about how much profit you are going to make in the coming years so that you can repay the loan back in time.

Before applying for a loan, you should check the cash flow projections because failing to repay in time will only affect your credit score which in turn will affect your chances to secure loans in the future.

To obtain a collateral-free business loan, your business should have a healthy credit score. A bad credit score does not mean that you’ll not get a business loan but it does affect your credibility which in turn makes you get a loan at a much higher rate of interest. A business owner can easily increase his or his business’s credit score by reducing the credit utilisation ratio. It amounts up to about 30% to 35% of the credit score. The ratio reflects the amount of debt a 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, a source of generation of revenue, a well-documented financial report, cash flow projections, and the amount of profit they can generate once the loan is sanctioned.

A business should clearly state the purpose of the business loan and where the amount is going to be invested.

• PAN card of the owners

• PAN of the company

• Account statement of the year

Collateral-free business loans are small in an amount which is given only to boost the growth of small and medium-sized businesses. So you must have prior knowledge of the following things before applying for one:

• You should be aware of the cash flow projections, i.e. should have a sound understanding about how much profit you are going to make in the coming years so that you can repay the loan back in time.

• Before applying for a loan, you should check the cash flow projections because failing to repay in time will only affect your credit score which in turn will affect your chances to secure loans in the future.

• To obtain a collateral-free business loan, your business should have a healthy credit score. A bad credit score does not mean that you’ll not get a business loan but it does affect your credibility which in turn makes you get a loan at a much higher rate of interest. A business owner can easily increase his or his business’s credit score by reducing the credit utilisation ratio. It amounts up to about 30% to 35% of the credit score. The ratio reflects the amount of debt a 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, a source of generation of revenue, a well-documented financial report, cash flow projections, and the amount of profit they can generate once the 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 Loans:

• The one and foremost benefit is no dependency on a third party for the guarantee

• Very attractive and subsidised interest rates

• Flexible duration of repayment of up to 24 months for a very small amount of loan

• 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.

Thus, a collateral-free 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 owner might not want to risk his assets for a loan and this is where collateral-free loans have been so beneficial for them.

Sources of Collateral-free Business Loans in India

When it comes to collateral-free business loans, there are a plenty of options including informal sectors, online lenders and the NBFCs. NBFCs have been the most reliable and preferred option amongst these three and have been able to attract many small businesses with its flexible policies and easy loan approval process.

Collateral-free business 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 entire loan application procedure takes a few working days which is very long for the business owners who don't want to waste months of their time on getting a loan sanctioned. NBFC business loans also have no prepayment charges which traditionally banks do. This helps the borrower to save some money in the process of repayment.