MSMEs often find it challenging to finance their capital requirements with a secured loan due to limited pledgeable assets. Unsecured business loans solve this issue by offering credit without the need for collateral security. Small business owners can secure the required capital as long as they meet the specific eligibility criteria set by the lender.
Types of Unsecured Business Loans
Let’s have a look at the different types of unsecured business loans you can avail:
Line of Credit
A line of credit allows you to flexibly borrow money to meet business requirements up to a preassigned credit limit. The credit limit is determined based on your credit score and interest is charged only on the borrowed sum.
Term Loan
Term loans are unsecured business loans that offer access to substantial capital upfront to meet varied expenses like expansion, marketing, advertising, etc. When you apply for a business term loan, you need to repay the borrowed sum with interest over the specified tenure, generally ranging up to 5 years.
Working Capital Loans
Working capital loans are another type of unsecured business loan. These instant business loans can be availed to meet various day-to-day operational costs of the business like payroll expenses, supplier payments, utility costs, etc.
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Eligibility Criteria for Unsecured Business Loans
When applying for a business loan without collateral, you should carefully consider the eligibility requirements of the lender. Generally, eligibility checklists include the following parameters:
- Business Vintage: The business must be operational for a minimum of 1-3 years.
- Credit Score: The applicant must possess a credit score of 700 and above.
- Minimum turnover: The applicant must meet the minimum turnover requirement.
Benefits of Unsecured Business Loans
Applying for a unsecured new business loan can be beneficial in the following ways:
No Collateral Needed
One of the chief advantages of an unsecured business loan remains the absence of collateral requirement. Most start-ups and small businesses lack the substantial assets needed to pledge as security for a secured business loan. Unsecured business loans eliminate this issue.
Quick Approvals
Without additional collateral papers to assess, most lenders approve and sanction unsecured loans faster than secured ones. So, if you need an instant business loan, you can consider applying for an unsecured loan to gain immediate access to credit.
Flexible Terms
Most unsecured business loans come with flexible terms that can be modified according to your business requirements. In other words, you can tailor the repayment terms to better suit your cash flow situation and budget to avoid financial strains.
Drawbacks of Unsecured Business Loans
Despite these advantages, unsecured business loans also come with a few drawbacks:
Higher Interest Rates
Unsecured business loans are riskier for the lender since they are sanctioned without any collateral security. Lenders tend to offset this heightened risk with higher interest rates. In other words, when you apply for a business loan without collateral, you may end up paying more interest over the loan tenure than secured loans.
Stringent Credit Requirements
Since there is no collateral involved, lenders often impose strict credit requirements for unsecured business loans. Strict credit requirements can pose a challenge for businesses with lower credit scores seeking unsecured business loans.
Conclusion
In a nutshell, unsecured business loans can help enterprises meet their funding needs without offering collateral. While unsecured loans come with higher interest rates and stricter credit requirements, applying for such business loans allows you to access quick credit on flexible terms.
