A Complete Guide to Collateral-Free Business Loans
A collateral-free business loan is an ideal financing option for all your business needs. All businesses need finance to fund their growth. Working capital requirements, the purchase of new machinery, the launch of a new product, expanding across geographies, setting up stores, marketing, etc. are examples of business needs.
A collateral-free business loan is basically a business loan where no collateral is required. In simple words, the lender will sanction the loans to you at a fixed rate of interest even if you do not have collateral or any assets to pledge. Collateral loans are also known as unsecured loans.
Key Highlights of a Collateral-Free Business Loan
- They do not need collateral to obtain the loan
- Minimum documentation is required
- Flexible tenure options are provided
- Low-interest rates may be offered depending on the applicant’s profile
- Quick approvals if all other factors are ok
- Negotiation is possible especially if you are an existing customer
Types of Collateral-Free Business Loans
- Term Business Loan – Term loans come with a repayment tenure of up to 4 years. It can be a high-value business loan with no collateral. This loan is helpful to fund your business needs within a short period of time.
- Overdraft Facility – The overdraft (OD) facility is for customers having a current account with the lender. You can borrow money and the lender will charge an interest rate on the sum used for business purposes.
- Loan on Business Credit Card – This loan is available to those who already own a business credit card. They can get a pre-approved loan. The lender approves the loan based on your credit card usage and repayment pattern. The loan can be credited to your bank account within a few hours.
- Government-backed financing schemes – The Pradhan Mantri MUDRA Yojana (PMMY), has been rolled out by the government to help MSME businesses achieve their business goals.
- Consumer Loans – These loans can be used by businesses to buy equipment like computers, laptops, machinery, printers, air conditioners, etc. to ensure the smooth functioning of the business.
Eligibility Criteria for a Collateral-Free Business Loan
- Applicant must be an Indian citizen
- Applicant should be self-employed
- Age group of the applicant should be between 26-66 years
- Applicant should have been in business for a minimum of 3 years
Documents Required for a Collateral-Free Business Loan
- Identity Proof – Aadhaar card/Driving license/Pan card/passport
- Income Proof – Bank account statement for the past year/IT returns for the past year
- Lender-specific document requirements
Factors affecting Eligibility for a Collateral Free Business Loan
- Credit Score – A credit score of 750+ is more likely to get a collateral-free business loan faster. You might also get an attractive interest rate.
- Current Income – Since it is a collateral-free business loan, lenders look at the income to assess the repayment capacity. The higher your income is, the better interest rate you might get on the loan.
- Repayment History – A very important part of your credit score, lenders treat the repayment history as a benchmark for your future financial discipline. Make sure you have a clean repayment history.
- Amount of Loan – Lenders might be willing to approve a loan that is smaller in size as their risk is limited.
- Purpose of the Loan – Lenders would always want to know how their funds will be used. It is advisable to prepare a detailed business plan before you approach the lender for the loan.
- Additional Income – Be sure to disclose your additional income sources when you apply for the loan. These sources could be income from investments, a bonus, inherited wealth, or any other source. An additional income source always helps in getting the loan approved faster.
Disadvantages of a Collateral-Free Business Loan
- Higher interest rate – Collateral-free business loans are generally available at a higher interest rate as compared to secured loans. This is because the lender’s risk is higher with an unsecured loan.
- Difficult to get approval – Since the lender’s risk is higher with a collateral-free business loan, they may ask for various documents and take longer for verification.
- Difficult to get high-value business loans – Lenders are typically averse to approving high-value collateral-free business loans considering their risk is higher.
The Application Process for a Collateral-Free Business Loan
There are so many loans available and it can be an overwhelming process to select the right one. So, how do you go about it?
- Find the lender that suits you – Conduct thorough research on all the lenders providing a collateral-free business loan. Compare and see which one has the best offer.
- Keep your documentation ready – Prepare and keep the documents needed ready in advance. You will need identity proof, income proof, and any other document specified by the lender.
- Fill out the application form – Carefully read the application form and fill it out completely and accurately. Make sure not to miss out on details to avoid rejection of your application.
Things to Note for Getting a Collateral-Free Business Loan
- Business Plan – Prepare a detailed business plan. The business plan should provide the scope of the business with earning projections. A well-prepared applicant is more likely to have their loan application approved.
- Credit History – Before you apply for a loan, make sure you have a good credit score. A credit score of 750+ is likely to get a loan approved easily.
- Other Criteria – Aim to have a good reputation. Pay your credit card bills/loan EMIs etc. on time. Have a good online reputation and presence. Lenders are more comfortable approving a loan for someone trustworthy.
Collateral-free business loans are unsecured loans that do not need collateral to obtain a loan. They need minimum documentation with flexible tenure options. Collateral-free business loans might come with a higher interest rate. The loan amounts offered might be small. It is best to maintain a good credit score and choose a lender that suits your financial requirements.