An unsecured business loan is one of the leading financial products available for companies with at least 3 years vintage. The loan amount is between Rs. 1 lakh and Rs. 1 crore and the interest rate starts at 12.99%. Tenure is between 6 months and 5 years. You can apply for the loan either at the physical office of the bank, or drop an online application on the website of the financial institution. But, is an unsecured business loan ideal for your needs? Here is a complete list of pros and cons of collateral-free business loans, so that you can take an informed decision.
Pros of an Unsecured Business Loan
Below-mentioned are benefits of a business loan:
No Need of a Collateral
While a secured loan requires you to submit an asset acceptable as collateral to the bank, in an unsecured loan, this is not the scenario. In collateral-less business loan, the funds are provided without any collateral. In collateral loan, the bank will assess the asset and perform a valuation test, upon which the loan amount and other conditions such as tenure and interest rate are determined. This asset can be repossessed by the bank, in case you default on the loan.
But, an unsecured loan does not involve all these processes due to lack of collateral requirement. Fund amount, tenure, interest rate are based on the profile and financial position of the company, annual turnover, business vintage, credit history, and other factors. There is no risk of asset repossession in case of a loan default.
Quick Turnaround Time
You can expect a faster turnaround time for unsecured loans as against secured loans. This is because the bank does not have to perform a value test of the asset in question. Also, online applications can be processed within no time, as all the application form demands for all the necessary details upon which the bank analyzes the applicant’s eligibility to the loan.
In an unsecured business loans, funds can arrive to your bank account in as soon as a week from approval of the loan, or as less as 72 hours. Thus, for any urgent expense towards your company, you can opt for a collateral-free loan, instead of a secured one.
Loan Amount As Per Repayment Capacity
Like discussed above, an unsecured loan amount is decided on various factors, but not on the value of the asset, since the loan is collateral-free. The fund amount is based completely on the company’s financials, so you can expect the best suitable amount. In a collateral loan, the bank may keep a margin of 30% to 40%, wherein only 60% to 70% of the asset’s current market value is considered as loan amount. But in an unsecured loan, maximum fund amount is provided depending on the cash flow, profits, and credit history of the firm.
Lower Personal Risk
In any loan, you have to repay the amount within a certain period. As the nature of loan is unsecured, there is no risk on your personal and business asset, such as equipment, properties, investments, etc. In case you are unable to repay the amount within a stipulated time, you can get the loan reschedule to a flexible repayment plan, which allows you to complete the payments. You can discuss with the bank about options to forbearance, deferment, refinancing, without risking rights to any property or asset you own.
Helps Build Credit History
When you pay the monthly installments on time till end of the tenure, or successfully close an unsecured business loan, the company credit score significantly improves. This allows banks to look at your business as creditworthy in case you apply for a new loan for the company, in future. Thus, if you are starting up as an entrepreneur and require funds, then a collateral-free loan can help in many ways, and one of the first instruments through which you can establish a good credit history for your organization.
Cons of an Unsecured Business Loan
Below-mentioned are disadvantages of a business loan:
Lower Amount of Fund
Though you can expect the best suitable loan amount in an unsecured loan, the same depends solely on the financial position of the firm, other financial reports, along with credit rating, and the vintage of the business. Thus, banks tend to provide a smaller loan amount as compared to secured loans, because in the latter, the asset assures a security towards calculation of a loan amount, which is not so in a collateral-less loan.
As the loan does not require a guarantor or collateral, banks wish to minimize the risk exposure, so they may apply a shorter tenure compared to secured loans. The repayment schedule could be tighter as well. For instance, consistent payment of monthly instalment may be mandatory, than a flexible repayment term, and likewise. In a secured loan, there could be greater options of repayment terms as against a collateral-free loan.
Higher Interest Rates
An unsecured business loan presents a higher risk to banks, as there is no collateral to depend on in case you default on repayments. In a secured loan a lower rate is applicable because the lender is assured of recovering dues in case of a default. But, this is not so when the loan is unsecured in nature. Thus the lending institution naturally applies a higher rate of interest on the loan, which is to offset the risk of default. This interest rate depends on the credit and financial profile of the company.
Stringent Eligibility Criteria
The eligibility requirement could be strict, especially regarding credit rating on your company, and at personal front as well. To prove creditworthiness of your company, you will have to submit audited financial reports. If you are taking a start-up loan, then you must even have an excellent and convincing business plan. The bank will scrutinize each and every relevant aspect of your organization, carefully, before sanctioning a loan amount.
Strict Action on Loan Default
Even though the bank does not require you to submit a security, it does not mean that in case of a default you can walk free without making the required payment. The lending institution can take a legal action against loan default and then the court can lay down an order, which has to be followed to recover the dues. This can risk several of your assets or bank accounts, which can help the bank to recover the dues. Also, the company credit score will take a tip. Thus, it is best to repay the amount in a timely manner to avoid any legal repercussions.
So, should you choose an unsecured business loan? Definitely you must if the loan scheme and its eligibility requirements are in your interest. The requirements for unsecured loans could be rigid, but the loan product in itself has many advantages. However, make sure to repay the loan in time and avoid any trouble.