A ‘Business Loan’ is a loan that is availed by business-owners or entrepreneurs to turn their ideas into reality and get the finances to proceed with the startup. Loans are also availed to expand the existing business, broaden the reach and offer a bigger range of products. And a business loan is quite different from a personal loan and a personal loan taken for business purposes.
A business loan cannot be availed with the purpose of investment and one has to ensure that it is utilised to generate income and cash flow, resulting in employment generation to a certain degree.
For example, a business loan cannot be availed to buy land in a relatively underdeveloped area with the idea of selling it later when the real estate prices boom in the future. However, it can be availed to buy the same land with the intention to do agriculture or farming which ensures the generation of income and cash flow in regular intervals with the sale of goods, crops etc. Similarly, it is not applicable for the purpose of investing in stock market or any other similar vehicle where the value is appreciated with time, rather than the use of employment to produce income/cash-flow.
Unsecured loan
An unsecured loan is the financial assistance mostly provided by the non-banking financial companies, who are very similar to banks but have a different set of procedures to work with the borrowers and government licenses. The loan is facilitated by multiple partners in many cases and is very versatile in nature, the factors affecting it are economic and market conditions, business stage, operations and the financial stability of the borrower’s business.
An unsecured loan does not require the borrower to provide any property or assets in the form of a collateral or security for the financial institution to be able to sell it and recover the loan in case of business failure.
Banks have a relatively tighter eligibility criteria and almost always require a collateral to facilitate a business loan, that too a loan amount of 70 per cent of the asset / property value is offered to the borrower and the ratio can go up to 80 per cent of the asset value in rare cases.
A loan with strict eligibility criteria, plenty of limitations and an unimpressive ratio of loan amount to asset value are some of the disadvantages involved in secured loan when compared to a fairly easy eligibility process and lesser restrictions on what to do and how to do for business owners and without a need of collateral makes the unsecured loans a perfect choice for growing businesses.
A collateral free loan also provides peace of mind to the borrower as it does not require the business owners to sell any of their business assets or personal properties to repay the loan amount, this helps boost owners/entrepreneur confidence levels to work towards their goals with immense hard work and passion delivering the best services / products. On the other hand, it is a common practice for banks to sell the assets taken as collateral in order to recover the bad loans.
Secured loan
A secured loan as explained above is where the borrower will be asked to offer an asset or property or anything valuable that can be sold by the bank later to recover the loan amount in case of failure in loan repayment. Banks have a tough eligibility criterion to ensure that the possibility of a bad loan is mitigated to the best of their capabilities and even if they ever encounter such a situation then the bank always has the option to sell. https://www.lendingkart.com/business-loans/
Secured loans usually have a longer processing time and are disbursed after thorough validation of all the company and document details. The bank scrutinises each and every paper provided by the borrower and thus approves the eligibility if found no black spots in the process.
There are pros and cons with all the products and offerings, similarly, one of the best parts of a secured loan is the maximum amount that can be availed by the borrower. As the loan is secured by the asset provided in the form of security, a loan of very high amount can also be taken depending on the value of the collateral and the same is not possible via unsecured loan.
What is suitable for you?
Unsecured or secured loan — which is better? And will the choice made be beneficial over time?
While it is true that the unsecured business loan comes with a plethora of benefits and features, it may not be the best option for every situation and for all businesses. The biggest disadvantage of the unsecured loan is that the amount that can be borrowed without the need of a collateral will be very limited as the lender will be cautious about lending huge amount of money without any security to recover the loan which will limit the medium/big businesses to choose the unsecured loan as one of their options to seek financial assistance.
If your business doesn’t require crores of investment and a decade-long business plan and structure, then proceeding with an unsecured loan will be a better option. However, if you are looking to expand your business all over the nation and need some strong backup then you should consider going with the secured loan option and avail comprehensive financial assistance with the help of collateral.
Unsecured business loans features and benefits
Flexibility: Collateral-free business loans offer a relatively higher level of flexibility, allowing the borrowers to take extra cash as per the working capital needs and requires minimal paperwork. These loans also offer benefits and features where borrowers have the facility to repay the loans in part payments or just pay the interest amount in the initial days and then repay the principal amount once the business generates considerable profits to the owner.
Pre-approved offers: Depending on the nature of business and the overall business status, NBFCs provide a pre-approved offer which can be availed by the businesses without any hassle and this is pre-approved so it does not require one to meet the eligibility criteria or any such guidelines.
Flexible tenors: A higher tenure compared to secured loans to ensure that the business owner or entrepreneur has enough time to repay the loan and the interest amount without making it a burden on the business operations.
Eligibility criteria
Eligibility criteria simply consists of a set of guidelines that the applicants will have to meet in order to be eligible for a loan application. It is designed for the benefit of both the parties, while protecting banks or financial institutions from a bad loan and loan recovery, property seizure challenges and helping the borrowers to be more financially responsible and maintain their credit-history/CIBIL score and not impose unnecessary loans onto themselves.
- A minimum age of 18 years and up to a maximum of 65 years (might vary).
- A minimum business existence of about 1 year, can extend up to 3 years depending on the nature of business, location and other factors that a financial institution might consider.
- Business should have had some profitability in the past months.
- Annual turnover amount that is decided by the lender.
- It is mandatory for the applicant to have a valid Indian passport and be a citizen with no ongoing criminal cases.
- Good credit history and customer profile with no previous loan repayment concerns.
- CIBIL score that is 700 or above.
Documents required for unsecured business loan
Any loan requires some basic paperwork before the amount is disbursed. This is to verify the authenticity of the application and gather all the necessary details regarding the business, resources, necessity and get the general overview of the organisation/business.
- Loan Application form to be filled and signed
- Business plan that can be demonstrated by the Owner showing business sustenance for the next 2 years.
- Business establishment/existence proof
- Bank statement of the business account for the last 1 year
- Salary pay-slips of the employees for last 6 months (if applicable)
- Income Tax Returns for the past 1 year
- Passport-sized photographs
- Applicant’s Identity proof and all the necessary KYC documents
- Business address proof (all locations if applicable)
Apart from the above any other document that is required by the lender should also be provided by the borrower to ensure a successful application, processing and disbursal of the Business loan.
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