Unsecured Business Loan: Here’s how to apply online

Running a business requires capital at various stages — be it for expansion, upgrading equipment or just managing day-to-day operations. Often, businesses may not have assets to pledge for securing a loan, especially small and medium enterprises (SMEs) and start-ups. Unsecured business loans could be useful in such a scenario.

An unsecured business loan allows access to funds without having to offer collateral, making it a convenient option for many business owners.

Let’s understand all the key elements of an unsecured business loan.

What is an unsecured business loan?

An unsecured business loan is a form of borrowing where the lender offers a sum of money without requiring the borrower to pledge any security or collateral. Instead, loan approval is usually based on the borrower’s creditworthiness, income stability and business performance.

In short, an unsecured business loan means that you borrow based on your income level and credit history rather than against any tangible assets.

Types of unsecured business loans

There are various forms of unsecured business loans available, catering to different needs. Here are some of the most common unsecured business loan types:

• Term loan: A term loan is a lump sum amount you borrow and repay over a set period, generally with fixed monthly payments. With an unsecured term loan, there’s no need to provide collateral, and you can use the funds for any business need, such as working capital or expansion. Repayment tenures usually range from one to five years.


• Overdraft facility: An overdraft facility allows businesses with a current account to withdraw more than the balance available, up to a pre-set limit. This flexible form of credit can be useful for managing cash flow and handling unexpected expenses.


• Government-backed financing schemes: Some government schemes provide unsecured loans to businesses, particularly for Small and Medium Enterprises (SMEs). Schemes such as the Pradhan Mantri MUDRA Yojana (PMMY) and the Stand-up India initiative aim to provide financial assistance without collateral to encourage business growth, particularly in underserved sectors.


• Micro loans: Micro loans are provided by Microfinance Institutions (MFIs) to address borrowers’ immediate cash needs. The loan amounts offered through microlending can range from Rs 5,000 to Rs 2 lakh or more.


• Consumer loans: Businesses can also benefit from buy-now-pay-later schemes to acquire essential equipment like computers, air conditioning units or office furniture. This is a great way to spread the cost of large purchases over time without need of an upfront capital.

Benefits of unsecured business loans

Let’s explore how unsecured business loans can benefit your business:

• Faster processing and approval: Since there’s no collateral to assess, unsecured business loan approval processes are quicker. Lenders only need to review your credit score, business financials, and repayment capabilities, reducing the time taken for loan approval and disbursal. Moneycontrol offers a completely digital process to apply for business loans up to ₹15 lakh, in partnership with four lenders.


• Flexible repayment terms: Unsecured loans often come with flexible repayment terms. Depending on your lender, you may have the option to choose repayment periods up to five years, allowing you to adjust monthly payments based on your business’s cash flow.


• No risk to personal or business assets: As the loan is unsecured, there is no risk to personal or business assets, unlike secured loans where defaulting on payments could result in asset seizure. This makes unsecured loans a safer option for businesses that might not have significant assets to pledge.


• Builds creditworthiness: Taking out an unsecured business loan and repaying it on time can boost your business’s credit score. A strong credit score can improve your chances of securing larger loans or better terms in the future.

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Cons of unsecured business loans

Having discussed the benefits or pros of unsecured loans, let’s take a look at the drawbacks as well.

• Higher interest rates: Unsecured business loans may come with higher interest rates and fees compared to secured loans. Since lenders face more risk without collateral, they compensate by charging more.


• Strict eligibility requirements: To mitigate their risk, lenders often impose strict eligibility criteria for unsecured loans. These loans are typically reserved for established businesses with strong credit histories and substantial annual revenue. Startups or those with poor credit may find loans available but with less favourable terms.


• Personal guarantee often required: Many lenders require a personal guarantee from business owners, which puts personal assets at risk in the event of default.

How to get an unsecured business loan

Here are the primary steps to apply for an unsecured business loan

• Assess your financials: Before applying, ensure that your business financials are in order. This includes having a good credit score and stable revenue.


• Choose the right loan: Depending on your business needs, select the type of unsecured loan that best suits your situation.

Documents needed to apply for unsecured business loan 

When preparing to apply for an unsecured business loan, ensure you have the following documents ready:

• Know Your Customer (KYC) documents: These verify your identity and may include your passport, driving licence or other government-issued ID.


• Completed application form: Make sure the loan application form is thoroughly filled out and signed.


• Financial statements: Provide documents reflecting your business’s financial health, such as profit and loss statements and balance sheets.


• Bank statements: Submit statements from your business’s bank account covering the last six months.


• Tax documentation: Include your Permanent Account Number (PAN) card or Form 60, as applicable.


• Proof of business: Present documents like business registration certificates, licences or other legal papers that verify the existence and legality of your business.

ALSO READ: How to Secure the Best Business Loan Interest Rate

Conclusion

Overall, unsecured business loans offer a lifeline to businesses that need quick access to funds without the burden of pledging assets. The convenience and speed of unsecured business loan approval through platforms like Moneycontrol further streamline the process, making it easier to secure loans up to ₹15 lakh in a 100% digital process.