Many small businesses have boomed up in the last few years, and more and more individuals are becoming entrepreneurs. While business loans can be extremely useful while starting and growing a business, it can be time-consuming to take them from banks. This is why a lot of small business owners prefer NBFCs who give loans quickly and easily. However, it is also extremely important to understand the different types of loans, their benefits, and their cons to choosing a loan that suits your requirements.
Let us learn more about collateral free business loans in detail!
To start with the basics, let us first understand what exactly is a business loan! A small business loan is a product that is utilised to cater for the urgent needs that a small or medium business might have. A business loan can greatly help in providing the necessary funds at the right time to grow or sustain a business!
There are two types of business loans - secured and unsecured business loans.
A secured loan is protected by security or an asset. An item like a home or a car can be used as collateral while applying for a loan. The lender will then hold the deed or the title until the full loan is paid. Other items like stocks, bonds, or even personal property can be used for collateral. A secured loan has the benefit of providing a large amount of money as the borrower promises to repay it with security. However, unsecured loans are where the lenders take a risk by providing this loan as there is no asset or security in case of default. This is also why unsecured business loans have a higher rate of interest.
In an unsecured business loan, the lender judges you and your ability to repay a loan according to your character (includes credit score, employment history, and reference), your capacity (income and current debt), your capital (money in savings or investment accounts), your collateral (personal assets like home or car), and your conditions (the terms of the loan).
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By now you must have understood that collateral is an asset or a valuable item that one guarantees against a loan. On repaying a loan, the collateral can be repossessed or if the borrower fails to repay the borrowed loan, the collateral is retained by the lender.
A collateral free business loan is also known as a smart or an instant business loan which is quicker and easier to acquire. These loans can help small businesses reach their business requirement and grow the business, without the benefit of not losing any asset while making the repayment. The only requirement is to make sure you complete your business loan EMI payment on time without any default. Collateral free business loans are mostly required by owners or entrepreneurs of MSME (micro, small, and medium enterprises), and big businesses or industries do not qualify for it as they need capital which goes into tens, hundreds, or thousands of crores.
So, what are the steps of availing a collateral free business loan:
● Study the lenders to find a suitable one - There are various lenders online that offer collateral free business loans. Try and compare their features, customer service, repayment tenure, prepayment charges, interest rate. Pick one that suits your eligibility criteria and suits your requirements the best.
● Ensure that you meet the eligibility criteria - Every lender will have different eligibility criteria when it comes to availing a loan. Before applying, review the criteria and see if you make the match. Matching the criteria can be useful in increasing the speed at which you are getting the loan approval.
● Check your credit score and improve if necessary - Your credit score reveals you business’ worthiness and impacts the lender’s decision to approve your loan. This plays an important role in the process as you are not keeping a collateral while applying for a loan. If you have a low score, make sure to improve it by paying off any existing debts and reducing the use of credit cards.
● List the important documents - A collateral free loan requires you to submit some important documents like KYC details, business proof, and bank statements. It is essential to gather them beforehand so the loan application process becomes easier and faster. Ensure to not miss out of any documents as it can lead to a rejection of the application.
● Complete the application carefully - The process for applying a collateral free business loan can be simple if you have followed all the necessary steps mentioned above. While filling the PAN number, annual turnover, or even the nature of your business, fill it carefully while also rechecking. The numbers and data are reverified by the lender and hence are important. Any issues might lead to a rejection and hence it is essential to study a loan before availing it!
A collateral free business loan or an unsecured business loan can be the push your business requires. Make sure to follow the necessary steps to ensure a hassle-free loan application process.