Your Checklist For Taking An Unsecured Business Loan

Funding is crucial to start and grow a business. Manufacturers and service sectors require financial support to cover their working capital demands and long-term asset purchase objectives. Entrepreneurs can easily manage these requirements by availing an unsecured business loan.  

As the name suggests, unsecured business loans are a type of business loan wherein business owners can acquire funds without pledging any collateral. This primary feature acts as a boon for various small scale businesses as well as for businesses that are at a nascent stage. The lending market in India has made it easier for business owners to get easy credit facilities. However, there are certain things that borrowers must check before opting for an unsecured business loan. 

6 Things To Check Before Applying For An Unsecured Business Loan

• Check Lender’s Credibility

While taking an unsecured business loan; business persons must check selected lenders’ credibility. First of all, they must shortlist some financial service providers and check their website, physical address and other things. Besides, borrowers must check the market reputation of lenders and their provided services and customer service. 

Borrowers can check the first case by conducting online research and evaluating the reviews available on the website. Additionally, prospective borrowers can browse through the lender’s website and navigate to related social media channels or look at industry awards, ratings, acknowledgements. In the latter case, i.e. customer service related assurance, individuals can easily gather information by asking service-related questions and scrutinising their response. 

By conducting the above research, borrowers can genuinely assess a lender’s credibility. 

• Offered Loan Amount 

Another crucial step while taking an unsecured business loan includes comparing the loan amounts offered by various lenders. 

While evaluating an unsecured loan application, lenders usually check the creditworthiness of applicants, business vintage, turnover, existing obligations, average bank balance, bank statements, etc. Additionally, lenders may check the liquidity status of a company or check if that particular business has enough cash flow. Further, they can check the business plan/model (sales channel, marketing strategy, list of projects completed).

Since borrowers are applying for unsecured business loans, financial institutions thoroughly check these parameters to avoid defaults in future and provide loan amounts accordingly. In such cases, borrowers must compare various lenders and choose one that offers a high loan amount so that they can efficiently manage a business and purchase inventory, expand a business, upgrade technology, equipment, hire new employees, etc.   

Note: Business owners with a high credit score usually can avail a high value loan. This is because of their convincing credit history, whereby lenders easily sanction the loan amount. Additionally, the loan amount depends on the type of unsecured business loan chosen, such as business overdraft, term loan, line of credit, invoice financing etc.   

• Know Interest Rate 

Experts say entrepreneurs must apply for the required loan amount at the lowest possible interest rate. 

Here, individuals must know that the applicant’s creditworthiness governs the loan interest rate. Lenders assess this parameter by considering various factors, such as the owner’s repayment history, the loan’s purpose, and the applied loan amount. Other factors include business profitability, net income, type of business and operational year, outstanding commitments, cash flow analysis, etc. 

Borrowers with high credit scores can also negotiate with lenders and settle for better servicing terms. Applicants with a low CIBIL score must first try improving it and then apply for an unsecured business loan. 

• Check Loan Tenor

While taking an unsecured business loan, individuals must select a lender that provides a suitable loan repayment tenor. Flexible repayment tenor allows individuals to choose Equated Monthly Instalments (EMI), which they can easily afford, and manage finances in a hassle-free manner without burdening the disposable income.

Here, prospective borrowers can use the business loan EMI calculator available online and decide on a suitable tenor by entering the applicable interest rate, principal amount and adjusting the tenor per financial capabilities. These calculators allow borrowers to get an idea of EMIs and adjust loan terms until borrowers find a suitable tenor.  

Hence, borrowers must choose a lender that offers flexibility in the repayment process to manage monthly business expenses efficiently.              

• Check Application Process And Sanction Time

Almost all lenders/financial institutions demand a similar set of documents for the loan application process. Nevertheless, borrowers must look for a lender that offers easy-to-meet eligibility parameters and a simple documentation process. Nowadays, most lenders are extending an online loan application facility, reducing the complexity of monotonous paperwork. Due to minimal paperwork and an online process, lenders ensure a hassle-free and faster loan approval. Hence, prospective borrowers must check and compare the loan approval time of various lenders.  

Invoice financing is one such type of unsecured business loan that individuals can avail quickly.

Invoice financing denotes a process where businesses can get advances against unpaid invoices from their customers. This type of financing helps businesses cover short-term liquidity crises and efficiently manage working capital needs. 

There are two types of Invoice financing, namely Invoice Factoring and Invoice Discounting. In the first case, businesses avail capital by selling the unpaid invoice to a third-party factoring company. Here, the third-party factoring company collects money from customers. On the other hand, in Invoice Discounting, the process is completely confidential. At KredX, business owners can get fast and transparent Invoice financing (Invoice Discounting) within 24-72 hours without any hassle.    

• Find Out Additional Charges

Apart from checking the interest rate, prospective borrowers must compare the additional costs of taking an unsecured business loan. These costs include processing fees, penalty charges if one misses EMI, and foreclosure charges. 

Borrowers must be aware of these costs to get an estimate of the total borrowing cost. Additionally, lenders often add insurance to the unsecured business loan to safeguard interest in the event of a borrower’s death. In such cases, lenders/financial institutions deduct premium paid for insurance from the loan amount. This increases the total cost of the loan. 

Further, there might be some hidden charges, such as establishment fees, direct debit fees. Hence, prospective borrowers must choose a lender that offers unsecured business loans maintaining complete transparency. 

Bottom Line

Capital is the bloodline of every business. Businesses need funds at every stage to continue their daily operations smoothly and expand further. This capital requirement is efficiently satiated by the Indian lending market, offering unsecured business loans to potential customers. Though this type of financing is easily available, borrowers must check the loan amount, interest rate, additional charges, and processing time to secure the best-unsecured business loan. After assessing these factors, borrowers must optimally select a lender that aligns with their requirements and expectations.