Unsecured Business Loan | How To Apply | Basic Guide

Simply, unsecured business loans are loans without collateral. A business individual or company avail this type of loan for starting or expanding a business. As it comes as a collateral-free loan, it is the best funding option for startups in India.

Here in this article, we put information about which banks offer unsecured business loans, who are unsecured business loan lenders in India and how do you get a business loan. Also, this article includes detailed information about the interest rates of unsecured business loans.

Existing or startup companies both can raise capital through unsecured business loans for expansion, project financing or equipment financing.

Is it Right to Avail Unsecured Business Loan?

Pros

First of all, unsecured loans are less risky loans from the entrepreneur’s point. As it doesn’t need any security, it is easier to obtain. Generally, banks or financial institutions check the repayment history of your previous loan.

As it needs less paperwork than a secured loan, you can get it fast. Mostly, you can expect the loan disbursement within three banking days. Even, some of the financial institutions also offer paperless loan application. So, you can apply for the loan online also.

Banks offer an exclusive commercial loan scheme to empower women entrepreneurs in rural and urban India. This focused approach to commercial finance helps women entrepreneurs gain easier access to unsecured loans for businesses.

Finally, in the case of bankruptcy, the court may discharge unsecured loans, but it won’t typically discharge secured ones.

Cons

First of all, lenders charge a higher rate of interest on the loan amount compared to the secured loan. In most of the cases, an unsecured loan comes with a small credit limit. If you want to have a big amount of credit limit, then you can’t go for unsecured business loans.

The tenor of an unsecured loan is shorter compared to using collateral. The debt repayment process is shorter so that you don’t have much time to pay off your loan. Due to the higher rate of interest and short tenor, you will need to pay large amounts of installments. And in case of any failure of paying an installment, you will land up with a poor credit score.

Unsecured Business Loan Interest Rate

Generally, banks and financial institutions charge a higher rate of interest than secured business loans. Banks calculate the interest rates in two different ways. These are flat and floating rates. Before applying for the loan, you must check the interest rate with terms and conditions in different banks.

Mostly, Government banks like Allahabad Bank, Corporation Bank, State Bank of India offer a lower interest rate compared to private banks. On the other hand, Deutsche Bank, ICICI Bank, Axis Bank, and HDFC Bank have easy processing and disbursement system.

In conclusion, the interest rate typically varies from 14% to 24% in unsecured business loans.

Unsecured Business Loans Eligibility Criteria

Some of the basic eligibility criteria are

  1. The business needs to be in operation for at least 5 years in the same line of business.
  2. The company will need to submit documents such as balance sheets, profit and loss accounts, tax computations, audit reports, and the last 2 years’ reports from the Directors.
  3. Also, you will need to provide the bank statement of 6 months in the name of the applicant or the business name.
  4. KYC documents of partners/promoters/proprietor/key directors.
  5. You must have proper knowledge and experience in the business. Banks will prefer that your business has been showing stable signs of growth at least for the last 3 years. Some banks give a loan amount of up to 60 to 80% of your median annual profits.
  6. For individual applicants, age is a factor. Most banks disburse business loans to individuals aged between 24 to 65 years.
  7. You will need good credit reports / CIBIL score while applying for a loan. This is by far the main criteria to be eligible for a business loan. You must have a credit score of more than 750 for getting an unsecured business loan easily.

Actually, the eligibility criterion varies from bank to bank and so also the procedures and formalities. So, it is better to check with various banks and financial institutions before making the decision.

Documents Required for Unsecured Business Loan

  1. Income Tax Returns of the last 3 Years
  2. Last 3 years audit reports and audited Financials including those of associate companies if applicable
  3. Your debtors and creditors list with transaction details is a must.
  4. Last 12 months bank statements
  5. Certificate of Incorporation – for private limited or limited companies
  6. Partnership deed for LLPs, MoA (Memorandum of Association) / AoA (Articles of Association) for Private Ltd companies
  7. Certificate of Registration for sole proprietors or Single Person Company
  8. Residence / Office Ownership Proof
  9. Aadhar Card for Directors, Promoters, Applicants
  10. Address Proof and Identity Proof ( Passport, Voter ID, PAN Card, Driving Licence, Aadhar Card )
  11. Utility Bills for Telephone / Electricity / Internet
  12. Company and Directors PAN Numbers
    Cash flow statements and cash flow projections for more than 1 Crore loans
  13. Equipment or Machinery Invoices or Performa invoices or Quotations for Equipment financing from vendors.

Unsecured Business Loan from NBFC

Apart from banks, Non-Banking Financial Companies offer unsecured business loans. However, the interest rate and terms may vary. Here we put a list of NBFCs where you can apply for the loan even online.

  1. Aditya Birla Finance Ltd.: The company offers unsecured loans with an average interest rate of 17%. The minimum loan amount is Rs 50000 up to Rs 15,00,000
  2. Arohan Financial Services Ltd.: This NBFC offers unsecured loans with an average interest rate of 25%. The minimum loan amount is Rs 5,00,000 up to Rs 75,00,000
  3. Bajaj Finserv: The company offers unsecured loans with an average interest rate of 20%. The minimum loan amount is Rs 1,00,000 up to Rs 30,00,000
  4. Capital First: This NBFC offers unsecured loans with an average interest rate of 20%. The minimum loan amount is Rs 10,00,000 up to Rs 75,00,000
  5. Edelweiss Financial Services Ltd.: This company offers unsecured loans with an average interest rate of 20.50%. The minimum loan amount is Rs 3,50,000 up to Rs 25,00,00,000

Unsecured Business Loans for Startups in India

Startup companies can raise funds through unsecured loans too. Also, the Government has different schemes for startup companies in India. One of the most popular in MUDRA. Under this scheme, you can approach the banks for funding Rs 50,000 to Rs 10,00, 000.

Most of the banks and NBFCs sanction loans to established companies. Recently, because of the rising NPAs banks have made the terms and conditions more stringent for unsecured business loans for startups. However, a progressive company can expect a loan without collateral from banks depending on other aspects like transactions, lesser cheque bounce, good CIBIL score, etc.

Definitely, an unsecured business loan is an easy way of getting finance for your business both in the starting phase or for expansion. However, if you have property or eligibility for providing collateral then applying for this type of loan is not a wise decision. We hope, this article will help you in applying unsecured business loans for your company easily.