As a small business owner, you wouldn’t be the first to consider applying for business loans to meet operational needs. Access to working capital and general funds is a recurring challenge for all businesses, especially the MSME sector. And while you may have a great business plan and even have accelerated growth for your business, there are times when additional funds would be helpful.
Business loans – especially unsecured business loans for SMEs comes as a relief in such times.
In this article, we will take a look at:
- What is an unsecured business loan?
- What are the pros and cons of unsecured business loans?
- How to grow your SME with business loans?
Let us get started.
What is an unsecured business loan?
Unsecured business loans in India are short-term loans offered by banks and financial institution to MSMEs and emerging businesses. These loans do not require MSMEs to offer collateral as security and is offered based on the company’s financial health and profit history. The qualifications and documentation required for applying to unsecured loans are minimal, making the process hassle-free, quick, and less overwhelming.
Because of the zero-collateral requirements, these loans are also known as collateral-free loans, and based on the lender, can be approved and disbursed in as less as 48-72 hours.
What are the advantages and disadvantages of collateral-free loans in India?
The 65+ million MSME sector in India is often considered as the backbone of the economy, contributing to its GDP (almost 30%), employment opportunities, and exports. While finance has always been a pressing concern for the sector, availing it has been equally challenging.
With unsecured loans though, it is easier to avail quick funds when required. It does however come with a few challenges. As a business owner, if you are taking a collateral-free loan for your business, stay mindful of its pros and cons.
Advantage of unsecured business loans
- Does not require any assets to be pledged as security
- Complete online loan application process to keep it quick, convenient, and transparent
- Less documentation required e.g., 6-12 months bank statement, business proof such as GST certificate or Udyam registration, business ownership proof such as telephone/water/electricity bill, proprietor/business owner’s PAN and Aadhaar card etc.
- Fast loan approval and disbursal process usually within 48-72 hours
- Short-term loans with EMI based repayment options from 1-5 years
- Unsecured business loans up to 30 lakhs available to businesses with strong profit history for 2 years, and future growth potential
- Flexibility in fund utilisation for business growth and expansion
- Submission of detailed business plans for loan utilisation, not required
Disadvantages of unsecured business loans
- Loan interest rates comparatively higher i.e., 12-18% depending on the lender
- To avail, business must have profits and strong financial statements
- Small amount loans, hence, not suitable for SMEs looking at larger funding
- Meticulous document verification conducted by banks and NBFCs before disbursing SME loans without collateral
- Defaulting will put a stain on borrower’s credit score, affect future loan approvals, and start a debt cycle
How to grow business with business loans?
What is the purpose of a business loan? Should you take a loan to reduce working capital challenges? Or take loan for buying new equipment? Or to recruit new resources?
The purpose of small business loans is to provide MSMEs funds when they need it most, so that their business operations are not affected, and expansion is possible.
As a small business owner, some of the ways you can use unsecured loans to grow your business are:
- Get access to working capital when needed
Unsecured business loans are hassle-free loans. Less documentation, simpler eligibility criteria, online verification, no security asset required – in short, simpler to avail funds when needed.
Most MSMEs face working capital challenges. Dependence on timely customer payments often makes it challenging to manage day-to-day operational expenditures. Unsecured SME loans provide relief in such times by providing immediate funds ensuring seamless operations.
- Buy new machinery and equipment for manufacturing
Small businesses, especially those involved in manufacturing and production, often need to get new machinery to scale production capacity. And it requires funds.
Whether it is for repairing or maintaining old machinery, or buying a new one, it is a costly affair. With SME financing, it is convenient for businesses like yours, to get the equipment you need without having to disrupt daily operational funds.
- Purchase raw material for inventory
A smart way to grow your business is to forecast, plan, and stock up for high-demand periods. While large enterprises do it all the time, it is also possible for MSMEs to plan and manage inventory with timely business loans.
Based on seasonal demand, as a business owner, you can avail a business loan, procure and purchase raw material, and start production to stock for inventory. This will avoid overstocking and dead stock and keep profit margins high. You can even schedule re-orders based on demand.
- Invest in marketing activities for promotion and business expansion
Whether you want to tap new markets, find new customers, generate sales leads, create brand awareness, or promote new products/services, marketing is essential for business growth. And marketing cannot be fully leveraged without adequate funds.
You can invest in digital marketing services for SMEs to roll out marketing campaigns and activities suited to your budgets and business requirements. With unsecured loans it is possible to plan spends and do more with marketing.
- Rent a new space or hire employees for growth
During the pandemic, many businesses gave up their office spaces and/or factory sheds to cut costs and accommodate remote style of working. Now with the economy in the recovery phase, businesses are once again leasing spaces and hiring new employees to scale and grow their business, build trust, and get back in full swing.
In such situations, a business loan will help with funds required for renting office spaces and hiring employees.
Closing thoughts: Getting a business loan in India
There was a time when the loan application process in India was tedious, complex, and time-consuming. There were different eligibility criteria and documentation required, making loan application overwhelming for MSMEs.
Today, with automation and digital transformation things have progressed significantly. The government has moreover introduced several MSME loan schemes to facilitate business financing e.g., PM MUDRA Yojana, ECLGS and more.
Similarly, private banks and NBFCs have also realised the challenges MSMEs face and the importance of MSME financing, resulting is easy-to-access loans, more flexibility, and easier repayment options.
Moreover, there are websites and online loans marketplaces that list the best rates and loan offers from different lenders to allow MSMEs the option to find the best lender for their business.
Availing loans today is not only getting easier but also beneficial for MSMEs.