Lenders have to cover for the risk of loan default, and hence, the collateral. Collateral is an asset (real estate, car, gold etc.) pledged as a guarantee for loan repayment. In case the borrower defaults, the lender has the right to liquidate the collateral for debt recovery.
However, not all loans are created equal. Some involve collateral and some don’t.
- Secured loans: This loaning option involves collateral, and hence the name. Secured loans are easily accessible at low-interest rates, as the risk for the lender is covered. The risk of losing the pledged asset runs high in an event of repayment default.
- Unsecured loans: These loans are devoid of any collateral whatsoever. Expect higher interest rates, lower potential borrowing amount, tighter repayment schedules, and faster approvals. Interest rates can be competitive with NBFCs like Fullerton India.
Why do unsecured loans exist?
Businesses require raising funds for various business requirements, notably, working capital, existing loan repayment, purchasing inventory, supplies, equipment, and more. A secured business loan would require them to pledge an asset as collateral. But many small businesses do not have an asset to pledge. Even if they do, they might not pledge the asset for the fear of losing it in an event of a default. That’s where unsecured business loans step in.
- Unsecured business loans involve zero collateral, meaning your asset is safe, which otherwise would be at stake until the loan is paid off in full.
- As the asset evaluation is not required, expect faster processing and approvals.
- The term periods are usually short. So, no long term liability, which is bad for business.
- No collateral requirement also means minimal paperwork and related hassles.
How to get a small business loan without collateral?
An unsecured small business loan is a liability and should be approached with caution. Or else, things can get messy. Here’s how to approach the loan for the best end of the deal.
Choose the right lender:
Unsecured small business loans come in all shapes and sizes. The real deal is to choose the one suiting your needs and repayment capacity. You have machinery loan to upgrade machines and equipment. The working capital loan helps bear staff salaries and account payables for businesses with high seasonality. Security-free loans for women entrepreneurs are also readily available.
Look at your cash flow:
Determining your cash flow projections is imperative to know how much you can repay. Over-loaning burdens your budget and makes repayments tough, leading to default. When you default, your credit score nosedives, which makes it impossible to borrow money in future.
Improve your CIBIL score:
A CIBIL score 750 or above is loan friendly. Anything less attracts higher interest rates and shorter repayment schedules. To increase your CIBIL score, decrease your credit utilization ratio. Pay all your existing debts and report errors in the credit report to the concerned authority.
Create a Solid Business Plan:
Creating a business plan is not required but helpful nonetheless. It shows you are serious about utilizing the funds for business growth and revenue generation. A strong business plan, thus, helps bring down interest rates. The business plan should include your purpose of loaning, how it’ll be used to generate ROI, along with financial statements, and cash flow projection.
That’s the most crucial part. The quality of the loan depends on the quality of the lender. Prefer a lender that offers competitive interest rates, easy eligibility criteria, friendly service, and quick approvals and disbursals. With a nationwide footing and a strong record, Fullerton India fits the bill. Feel free to visit its website for a business loan calculator for informed decisions.