Key Points To Know About Business Loans Without Security In India

Opting for a secured business loan puts assets at risk if the repayment is not made on time. Hence, most entrepreneurs choose loans for business without security over secured business loans. GOI and financial institutions in India have rolled out several financing schemes to that end.

A business loan without security is ideal for MSMEs with fewer assets to pledge. Almost all Indian financial institutions offer unsecured business loans to businesses. Thus, a borrower remains under no obligation to pledge collaterals like machinery, real estate, stocks, shares, vehicles, or gold as security to obtain a loan. 

Business loans without collateral come with several attractive features such as quick disbursal, flexible repayment facilities, and minimal documentation, making them an ideal choice for MSMEs.

Types Of Unsecured Business Loans In India

1. Working Capital Loan

A working capital loan is for small-scale enterprises to finance their daily business requirements, such as buying raw materials, paying employees and vendors, rent, etc. As a short-term, collateral-free loan, borrowers do not have to pledge any collateral or security to the lender. The loan amount is disbursed to the borrower’s business account.

2. Term Loan

A term loan is one of the most common types of business finances, where borrowers must repay the loan over a specified period. The repayment term for both short and long-term loans ranges between 12 months and 10 years, while the loan amount can go as high as Rs. 1 crore. Premised on the nature of a business, this loan amount can exceed the stipulated.

3. Government-backed Loan

The government offers several financing options to MSMEs, such as MUDRA loans, Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGMFS), Credit Link Capital Subsidy Scheme for Technology Upgradation (CLCSS), MSME business loan, National Small Industries Corporation Subsidy (NSIC), and several others. 

4. Overdraft Facility

Under the OD facility, the lender sets a credit limit from which the borrower can withdraw funds in part. The interest rate is applicable only on the amount withdrawn from the sanctioned limit on a daily basis. 

5. Micro Loans

These are small business loans for MSMEs offered by Micro Finance Institutions (MFIs) to meet their immediate funding requirements. The loan amount ranges between Rs.5,000 and Rs.2 lakh, or more. Machinery loans without security offer easy financing for equipment, enhancing operational efficiency without collateral in a streamlined, accessible manner.

Features Of Business Loans Without Security

• Higher Interest Rate

Since unsecured loans require no collateral, there is always a risk attached. Therefore, the rate of interest is higher for unsecured business loans than their secured counterparts. The applicable interest rate is based on several factors the business’s annual turnover and credit rating and amount of loan sanctioned. 

• Nominal Documentation

Collateral-free business loans involve minimal paperwork since there’s no requirement for an asset. It also expedites the processing of a loan because financial institutions only need to verify a borrower’s credentials and need not bother about asset valuation or ownership details. 

• Easy And Flexible Process

Unsecured business loans can be availed easily by either applying manually or through reliable digital platforms like MANDII. The loan processing is quick and gets sanctioned without complex documentation. Once the loan is approved, it gets credited to the applicant’s account within a few working days.

Eligibility Criteria For Unsecured Loans

To avail a business loan without security, businesses have to meet certain eligibility parameters. It might vary across financial institutions. Eligibility for machinery loans without security typically includes business stability, credit score, financial records, and operational history. However, here is the list of standard eligibility criteria to apply for unsecured business loans –

• Age

The applicant should be between 25 and 65 years old. However, the age limit may vary from lender to lender.

• Business Performance

The business should be profitable in the last 3 years. 

• Business Existence

Businesses with a vintage of at least 2 years are ideal applicants for unsecured small business loans.

• Credit Score

Applicants should possess a healthy credit score. Higher credit ratings imply better chances of loan approval.

• Tax Return

The business should have its last year’s tax returns filed.

• Citizenship

The applicant must be a citizen of India, holding no criminal records.

Documents Required To Apply For Business Loans Without Security

Entrepreneurs applying for an loan for business without security will have to submit the following documents – 

• Filled application form
• Business plan
• Applicant’s passport-sized photographs
• Identity proof (PAN card, Aadhar Card, and Driving license) 
• KYC of the applicant, directors, or partners, if applicable
• Business registration certificate
• Bank statement of the last year
• Business address proof
• 1 year’s Income Tax Return
• Any other lender-specified documents.

Bottom Line

Today, almost all financial institutions provide unsecured business loans. Moreover, to boost the Indian MSME sector, they are now offering unsecured business loans online. Potential entrepreneurs can apply for such loans via reliable digital platforms such as KredX, from where they can access finance quickly. The interest rates may vary from one lender to the other. It is, however, safer to apply for unsecured business loans from a trusted institution to avoid unforeseen circumstances.