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Know about types of unsecured business loans and related conditions

Unsecured business loans do not require any collateral or mortgage and is based on a written consent that you will repay the borrowed amount. A collateral free loan for business is high-risk for the lender. So, banks and financial institutions may ask for a higher interest rate or a personal guarantee. If you sign a personal guarantee, you promise to repay personally if there is a default caused by your business. Read on to know about the different types of unsecured business loans and the eligibility conditions that the lenders usually put forward.

The collateral free loans include the following:

  • Term Loan:

It is a type of unsecured loan that you can get for a specific time duration and you have to repay it back in the form of EMIs (Equated Monthly Instalments) within that time.

  • Working Capital Loan:

You can apply for working capital loan to meet the day-to-day expenses of business. The lender will approve it based on your creditworthiness and repayment capacity.

Overdraft:

Overdraft is a type of loan or credit limit assigned by the lender that you can avail in parts as specified by the lender. The lender would charge the interest rate is charged only on the used or availed amount out of the assigned or sanctioned credit limit.

Loans under Government schemes:

There are several Government initiated loan schemes under which you can get business loans at comparatively lower rate of interest if you are a small business owner. For example, loans for start-ups, Prime Minister Employment Generation Program (PMEGP). Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), SIDBI’s Loans, etc.

Merchant Cash Advance:

It is a type of cash advance and one form of the types of unsecured business loans. It is based upon the credit card sales deposited in a merchant’s account. The loan amount will depend on the credit card swipes or monthly volume of the business.

Micro Loans:

Micro loans are funds that are generally offered by Micro Finance Institutions (MFIs) to meet the instance cash requirement of a borrower. The loan amount offered under Micro lending ranges approximately from a few thousands and can go up to lakhs or more depending upon business requirements.

Business Credit Cards:

If you are a business owner, you can also take business loans against your business credit cards. The loan amount is basically credit line(s) sanctioned by the lender. It is designed to meet the working capital requirements of your business.

Unsecured business loans are one of the quickest ways to arrange for funds for your business. But you have to meet certain conditions as required by lenders. These criteria may differ but some of the standard requirements are:

  • You have to specify the category of business. For example, wholesalers, retail traders, professionals, B2B providers, manufacturers, etc.
  • Disclose the number of years for which the business has been operational, for example three to five years.
  • Some banks or financial institutions may not have provisions for loans to start-ups.
  • You should have a robust credit worthiness and excellent financial history of the business.
  • Submit a proof that the business is profit making, projected cash flows for the next couple of years, its financial viability, etc.
  • You may have to present the details of using the loan amount in the form of a business plan or some other document.
  • Disclose the turnover of the business for the past few years.

How can you improve your chances of getting an unsecured business loan online or offline?

  • Visit the websites of banks and financial institutions. Compare the list of lenders, the terms and conditions and reviews left by other customers. You can consult a friend or family who has taken loans without collateral. Finally, go through the repayment rules, interest rates, the loan terms and select a lender.
  • Prepare cash flow projections in advance, business plans, a feasibility study and get your financial statements audited.
  • You should ensure that you have a good credit score and can do this by making your loan payments on time like the credit card bills, monthly loan instalments, etc.
  • Find out the details of eligibility criteria for unsecured loans from the lender’s website. If you do not meet the eligibility criteria, you can take steps for making ourself eligible.

Select a suitable loan for your current od future business needs from among the different types of unsecured business loans available with lenders. Go through the features, terms and conditions and eligibility criteria before you finalise a specific loan.

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