Unsecured Business Loan – Eligibility, Documents & Interest Rates

June 28, 2022

What is an Unsecured Business Loan?

An unsecured Business loan is the type of loan granted to an applicant from a bank or financial institution without any pledged collateral. These business loans are availed by startups to manage business flow operations. 

An unsecured business loan provides financial assistance to the businesses that don’t own assets to pledge as collateral and require funds to expand their business. Due to its unsecured nature, the banks or financial institutions have set various parameters to assess the applicants. Unsecured business loans are granted on the basis of an applicant’s: 

  • Income range 
  • Financial documents
  • Credit score

Types of Unsecured Business Loans

Banks and other financial institutions offer a variety of unsecured business loan options to the applicant with respect to their eligibility and requirements. Some of these loans are mentioned below: 

Term Loan

Term Loans are granted to the borrowers for a specified period of time. The repayment period, interest rate, and other charges applicable are predetermined before the loan disbursement. 

Working Capital Loan

The working capital are loans granted to businesses to meet their short-term operational requirements. It is to be noted that these loans are offered on the basis of the regular expenses of the concerned business. 

Bank Overdraft

An overdraft loan is a type of credit line provided by the bank which can be used in parts as dictated by the credit institution. The overdraft allows the customer to withdraw funds that might exceed the account balance. In such cases, interest is charged only on the amount of credit used.

Government Scheme Loans

The Government of India has launched a diverse set of schemes to provide financial assistance to startups or small businesses. Small businesses can avail of business loans at subsidized interest rates. Schemes such as Stand-up India, Start-up Scheme, and Prime Minister Employment Generation Program (PMEGP) aid start-ups in achieving their respective business goals.

Merchant Cash Advance

Merchant cash advances are a provisional instrument for the merchants to cater to their short-term credit requirements. This unsecured business loan is an advance issued based on the amount of credit card sales reflected in the merchant’s account. The loan amount is sanctioned according to the business’s monthly volume of credit card swipes.

Micro Loans

Microloans are generally offered to small businesses in underdeveloped parts of the country to cover urgent cash requirements.

Loans, credit, insurance, access to savings accounts, and money transfers are provided under this category. As mentioned earlier, the beneficiaries are those who do not have access to such traditional financial resources. The amount provided under such schemes can range from Rs. 5,000 to Rs. 2 lakh, depending on the necessities of the concerned business.

Business Credit Cards

Business loans can also be availed against a business credit card. The loan amount depends on the credit limit approved by the credit card provider.

Features of Unsecured Business Loans

Unsecured business loans are one of the most sought-after financial products, as it grants funds to the borrower without any collateral. So, let’s glance over the unique features of unsecured business loans for a better understanding. 

Collateral

One of the most distinctive features of an unsecured business loan is the absence of any collateral. Collateral serves as a security against the amount granted to the borrower. However, in the case of an unsecured business loan, the amount is written off as bad debt if the borrower defaults on the payment. 

Interest Rate

The bank will charge a high-interest rate on an unsecured business loan. The interest rate levied incentivizes the bank to grant such risk-rich loans to borrowers without any surety of repayment.  

Tax Exemptions

The borrowers of an unsecured business loan are not eligible to avail of the tax benefits, unlike secured loan borrowers who benefit from several tax exemptions from the government. For example, home loans grant tax benefits, and Unsecured business loans do not provide such benefits. 

Loan Amount

The loan amount of an unsecured loan extended by the bank varies significantly from secured loans. The bank will grant a higher amount to the borrower if they pledge collateral. Whereas they will not grant a substantial amount in case of an unsecured business loan. Irrespective of the credit score of the applicant. 

Repayment Term

The bank set shorter repayment terms for unsecured loans as they do not want to elongate the risk period. The repayment period generally ranges from anywhere between 3 months to 5 years. The monthly interest levied is variable with respect to the outstanding balance. 

Eligibility Criteria for Unsecured Business Loan

The eligibility criteria for an unsecured business loan generally varies from bank to bank.

Find below the essential eligibility criteria set for an applicant to avail of an unsecured business loan: 

AGE

The age of the applicant at the time of applying for the loan is set between 18 to 65 years. 

Credit Score

The applicant shall have a minimum credit score of at least 750. A good credit score also provides leverage to the applicant while negotiating the rate of interest to be levied on the loan. While a lower credit score would result in the applicant getting a loan with a higher interest rate or even getting their application rejected. 

Business Information

To avail of a security-free loan from the bank, the business should be in operation for at least five years. It is to be noted that there shouldn’t be any change in the line of business. The business must produce documents such as balance sheets, profit and loss statements, and tax computations for the past two years to ensure its financial viability.  

Income statement

The applicant must present documents with respect to proof of regular income. Salaried employees can produce salary slips, and self-employed individuals can exhibit their bank statements for repayment assurance. 

Mandatory Documents for Unsecured Business Loan

To complete your business loan application, you must submit a set of documents. All the credit institutions ask for these documents for sanctioning a business loan application. of You’ll be required to submit the following documents: 

  • Photo Identity Proof
  • Passport size photographs
  • Signature and Address proof 
  • Income Proof
  • Qualification Certificate of the Applicant
  • Bank statements.
  • Customer letter
  • OD limit as per bank statements
  • MOA along with incorporation certificate (In case of Companies)
  • Partnership deed (In case of Partnership)

How to Apply for Unsecured Business Loan

The interested applicant can apply for an unsecured business loan by visiting the nearest branch of the bank selected or through their official website. 

STEP 1:
The applicant is required to fill in the application form with details such as

  • Desired Loan amount 
  • Status of employment 
  • Annual Gross sales 
  • Years of Business Existence 
  • Contact details 
  • Collateral type 

STEP 2: 

After mentioning the above-mentioned basic details. The applicant is required to submit additional information on the business as follows:  

  • Type of Company
  • Nature of the business and Industry 
  • Bank statements 
  • Gross profit 
  • Any existing credit or EMIs 
  • Details of the Applicant
    • Full name 
    • Age 
    • Gender
    • Date of Birth
    • PINCODE of their residence
    • E-mail address
    • PAN Card

STEP 3: After filling up and submitting the requested information, the concerned representative of the bank will contact the applicant, and forward the application for assessment. 

STEP 4: In case the application of approved, the sanctioned loan amount shall be disbursed in the mentioned bank account of the applicant.   

Difference Between Secured Loans and Unsecured Loans

The table given below illustrates the difference between unsecured loans and secured loans offered by banks and credit institutions:

Basis of Comparison Unsecured Loans Secured Loans
Collateral Absence of any collateral against the loan  Collaterals are required in the form of property/raw materials/equipment/ machinery
Interest Rate The interest rates are generally higher due to the risk-rich characteristics of the loan The interest rate for these loans is generally lower than unsecured loans.
Loan Amount Loan amounts are sanctioned based on the operations’ requirements and are usually small-scale.  The loan amount sanctioned is typically substantial and issued based on the applicant’s credit history.
Processing Fee Low High
Tenure The loan tenure is determined for a short period. Generally, between 3 months to 5 years. The bank offers an extended loan tenure to the borrower due to the considerable amount involved. Generally, it ranges from 5 to 30 years.
CIBIL Score The lender examines the CIBIL score prior to granting loan amount and tenure. The CIBIL score is considered while determining the interest rate on the principal.  The lender does examine the CIBIL score, but much emphasis is paid to the valuation of the collateral. 
Approval Rate Low  High
Loan Disbursal Time The loan amount is released within four days. The disbursal period may range between 7 days to 10 days.
Pre-payment Options Flexible Rigid
Tax Exemptions  The borrower is not eligible to avail tax exemptions on returns   The borrower can avail of exemptions on taxes 

Benefits of Unsecured Business Loan

The unsecured business loan are extended to the borrower in the absence of any pledged collateral. Despite the high-interest rate, find below the following benefits to avail of such loans: 

Collateral-free

An unsecured Business loan provides an avenue for the borrowers to avail of funds for those who don’t possess or are not interested in pledging any assets. The borrowed amount can be used for a variety of purposes. Some applicants even use it to pay off overdue credits, which are to be repaid on priority.

Small Loan Amount and Brief Tenure

The loan’s purpose determines the loan’s amount and tenure. The loan’s small amount and brief tenure allow the borrower to swiftly pay off the loan by rotating the fund flow from different avenues toward the repayment. This also benefits the lender as they can quickly write off bad debts without causing any severe discrepancy in the balance sheet. 

Interest Rate on Unsecured Business Loan

The interest rate levied on the loan varies from bank to bank and applicant to applicant.

  • Interest rates are generally higher when compared to the secured loan 
  • The rate of interest determined by the leading bank on unsecured business loans is between 10.99% to 32%.
  • The processing charges on the application differ from bank to bank
  • The rate of interest is determined by the applicants’
  1. Age 
  2. Credit Score 
  3. Income 
  4. Employment 

 Frequently Asked Questions  

Who is eligible to apply for an unsecured business loan?

The unsecured business loan can be availed by both the salaried and self-employed individuals.

How does an unsecured loan differ from a secured loan?

The collateral pledged is the key factor distinguishing between an unsecured and a secured loan. An unsecured loan is collateral-free, i.e. the borrower has not offered any asset against the loan. On the other hand, a secured loan is sanctioned against collateral.

How much can I borrow from the bank if it’s an unsecured loan?

The amount granted in an unsecured loan is subject to the applicant's income. The minimum amount an applicant can avail of is Rs 10,000, with the maximum cap going up to 1 crore.

What is a bank's interest rate on start-ups if they apply for unsecured loans?

The interest rate is generally higher due to the absence of collateral. However, the rates can be negotiated if the start-up demonstrates its financial stability to the bank.

How much time will it take for a bank to disburse the loan amount to my bank account?

The bank assesses and verifies the loan application in 7 to 15 working days. The loan amount is immediately disbursed to the applicant's bank account after the complete verification process.

 

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Category:Business Loan

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