Unsecured business loans are also known as loans without collateral or mortgage and they do not require any security. There is only a written agreement with the lender that you will repay the borrowed amount. As lenders face a higher risk for these loans in terms of repayment, they may ask for a higher interest rate. Read on to know more about the unsecured business loan and the standard loan terms that the lenders may impose to ensure that the borrower pays back without default.
An unsecured or collateral-free loan may be of the following types:
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Term Loan
It is a type of unsecured loan that you can get for specific time duration and you have to repay it back in the form of EMIs (Equated Monthly Instalments) within that time.
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Working Capital Loan
You can apply for a working capital loan to meet the day-to-day expenses of a business. The lender will approve it based on your creditworthiness and repayment capacity.
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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.
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Merchant Cash Advance
It is a type of cash advance and one form of the types of unsecured business loan. 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 the monthly volume of the business.
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Micro Loans
Microloans are funds that are generally offered by Micro Finance Institutions (MFIs) to meet the instant cash requirement of a borrower. The loan amount offered under Microlending ranges approximately from. A few thousand and can go up to lakhs or more depending upon business requirements.
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Business Credit Cards
If you are a business owner, you can also take an online business loan 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.
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Loans under Government schemes:
There are several Government initiated loan schemes under which you can. Get business loans at a 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.
Unsecured business loans are one of the quickest ways to arrange for funds for your business but there are certain loan terms that you have to fulfil.
They include:
- 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 robust creditworthiness and excellent financial history of the business. Otherwise, most lenders would charge a high business loan interest rate in India when you apply.
- Submit 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.
In case you require funds for business but do not own an asset or property or do not prefer to keep a mortgage, go for an unsecured business loan. It is convenient and you can select among the different types of loans available under this category. Take care to follow the loan terms for hassle-free and quick processing.
