A Detailed Guide on Unsecured Business Loan: How To Apply, Benefits And Eligibility Criteria
India saw 13 startups entering the club of unicorns at the very beginning of 2022. Moreover, experts have predicted the growth of more startups in the coming years. If you have decided to start your long-dreamt-of new venture, then an unsecured business loan can be the solution to your financial worries.
Read on to know more crucial details.
What Is an Unsecured Business Loan?
When a financial institution provides a loan based on a borrower’s credit history and without any collateral, it is called an unsecured business loan.
Many business owners borrow unsecured business loans to finance their dreams. However, banks and other financial institutions generally lend it to people with good businesses and high credit worthiness.
Unsecured vs Secured Business Loans
This table below provides essential differentiating factors between secured and unsecured loans:
| Features | Unsecured Loans | Secured Loans |
| Collateral/Security requirements | Not necessary | Mandatory, in the form of residential or commercial properties/stocks/machinery |
| Credit score | Good credit history is a must | Credit history is not rigidly checked |
| Rate of interest | High | Low, as compared to unsecured business loans |
| Rate of approval | Low | High |
| Available loan amount | Reasonable | High |
Also Read: 11 Guaranteed Ways To Improve CIBIL Score
Unsecured Business Loan Features and Benefits
Crucial features of these loans are enumerated below:
- These loans are sanctioned without any collateral.
- Overdraft bank facilities are available on most unsecured business loans.
- Financial institutions strictly check the borrower’s income, CIBIL score and history of loan repayment.
- Unsecured business loans have a flexible loan tenure.
- Loan amount will depend on the size of the business.
Also Read: What Is A Small Business Loan? Benefits, Types And Other Features
Unsecured Business Loan Interest Rates 2022
Refer to the table below to check the latest unsecured business loan interest rates
| Bank/NBFCs | Interest Rates (p.a.) |
| HDFC Bank | 11.90% – 21.35% |
| Axis Bank | 14.25% – 18.50% |
| Fullerton Finance | 17% – 21% |
| Kotak Mahindra | 16% – 19.99% |
| IDFC FIRST | 14.50% onward |
| RBL | 17.50% – 25% |
| ICICI | 18% onward |
| Tata Capital Finance | 19% onward |
| Hero FinCorp | Up to 26% |
Note that the interest rate table is for educational purposes only. The final rate offered is solely at the discretion of the lender.
Advantages and Disadvantages of an Unsecured Business Loan
Given below are advantages and disadvantages of these loans:
Advantages are as follows:
- Quick loan process
When someone applies for a loan, it is generally a lengthy process because the officials go through the documents and assess the applicant’s worthiness.
The process of availing of this loan takes much less time. This is because documentation takes up much less time. As a result, the amount gets disbursed very quickly.
- No collateral
Financial institutions consider the eligibility and income of the borrower before sanctioning the unsecured loan amount. The borrower doesn’t have to submit any details of collateral.
Also Read: Unsecured Loans In India: Different Types Of Unsecured Loans Available
- No risk to business assets
Considering the fact that the borrower doesn’t have to submit the details of assets like commercial property, vehicles and inventories, business assets are not exposed to any risk.
Disadvantages are as follows:
- High rate of interest
These loans have the provision of no collateral. Financial institutions levy a high-interest rate on unsecured business loans to balance the risk.
- Risk of low credit score
If a borrower fails to pay EMIs on time, his/her credit score will be automatically lowered.
- Loan amount is low
As these loans involve risks, the amount available is generally lower than secured loans.
Unsecured Business Loan Eligibility Criteria
Eligibility parameters of unsecured business loans are listed as follows:
- Credit score of the business owner needs to be 750 or above.
- Applicant’s minimum age has to be 18, and maximum age has to be 65 at the time of the loan’s maturity.
- The applicant’s business needs to function from the exact location for the last one year. Additionally, it needs to earn profits.
- Applicants need to provide bank details of the previous 6 months.
- Importantly, borrowers need to have a regular source of income. Therefore, they need to submit their salary slips while applying for an unsecured business loan.
How to Apply for an Unsecured Business Loan?
Below are the steps to apply:
Offline:
Step 1: Visit the nearest branch of your chosen bank/financial institution
Step 2: Check with the officials about the amount that you will receive against your business loan eligibility
Step 3: Fill up the application form and submit the required documents. Finally, wait for the amount to get disbursed to your account
Online:
Step 1: Visit the official website of your lender
Step 2: Navigate to ‘business loan’ on the homepage
Step 3: Fill up every required detail in the application form
Step 4: A bank representative will get in touch with you and guide you on the next steps
Documents Required for Procuring Unsecured Business Loan
Below listed are a set of general documents required to apply for such a loan:
- Proof of income
- Passport size photograph
- Address proof
- Photo identity proof
- Proof of business continuity
- Signature proof
- Bank statements
Final Word
If you have wanted to build your startup, it’s time to get going. Don’t let financial woes let you down. If you have a good credit score and a good repayment history, you can consider borrowing an unsecured business loan.
FAQs on Unsecured Business Loan
Ans: The amount of money that one can avail of depends on the applicant’s income. The minimum amount is Rs. 10,000, and the maximum amount that one can avail of as an unsecured business loan is Rs. 1 crore.
Ans: Generally, a financial institution takes 7 – 15 working days to complete the processing of an unsecured business loan. After the institution completes verifying all the documents, it doesn’t take much time for the loan amount to get disbursed to your account. But, the time varies from one financial institution to another.
Ans: It depends on the bank entirely. Often, banks have a lock-in period of 6 months to a year. Sometimes, customers can pre-close a loan after the first EMI has been paid. Banks can levy pre-closure charges on individuals seeking to pre-close their loans. It is advisable to check the bank’s rules related to pre-closures of business loans.
Ans: If you have missed 1-2 payments, the lender might issue warnings. You might also have to pay fees. Lenders might increase the interest rate. Loan default takes place after 3-6 missed payments. After that, the lender might alter the loan agreement and offer lower payments over a longer period. The lender might terminate the loan agreement as well.
Ans: Given below are the few steps to follow if you’re worried about defaulting:
Inform your lender of the problem. They might alter the loan agreement that cater your requirements.
Talk to an accountant who can help you identify cash flow from other avenues of the business.
Choose the option of refinancing if it’s possible.
Finally, don’t panic.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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