The Indian MSME sector is on a growth spree. It is contributing significantly to the expansion of the Indian economy. This makes readily available finance options a crucial requirement for business owners who wish to grow with the market. Unsecured business loans are a prominent fund arrangement that can be useful for all types of business.
Financing with Unsecured Business Loans
Unsecured business loans are a financing option that permits borrowers to raise capital without mortgaging business assets. Conversely, a traditional secured loan requires pledging assets as a guarantee or security against the amount borrowed.
To issue unsecured loans, lenders rely on the credit history and creditworthiness of the borrower. Here, lenders like banks and Non-Banking Financial Companies (NBFCs) set eligibility criteria for borrowers to access funding based on their income statement, credit score, etc.
Types of Unsecured Business Loans
Unsecured loans include a variety of financial products tailored to meet the diverse needs of MSMEs without the requirement of collateral. Below are some of the most common types of unsecured loans available to businesses today:
Term Loan
Term loans are offered by lenders for a set period and incur interest on the amount borrowed. These types of loans are mostly chosen to cover long-term financial needs. Term loan interest rate is predefined by the lender and in line with ongoing market rates.
Merchant Cash Advance
Often referred to as MCA, merchant cash advances are ‘zero-collateral’ small business loans offered to borrowers with working capital needs. MCA is preferred by small and mid-size businesses as the repayment of the loan is directly linked to the sales they make daily.
Business Credit Cards
Similar to retail credit cards, business cards allow liquidity for business purchases with staggered repayment options.
Working Capital Loan
These are short-term debts that enable the borrower to meet their day-to-day operational expenses and financial obligations.
Is an Unsecured Business Loan the Ideal Option for MSMEs?
Given the nature of the MSME sector, unsecured business loans play a vital role in their growth. MSMEs in India are often exposed to financial crunches. The pinch is felt more harshly when managing large projects that require an immediate capital infusion.
Recognising these business needs, NBFCs and banks provide a financing option with an easy application process and quick access to cash flow. Here are some of the advantages offered by unsecured business loans to MSMEs:
No Assets as Collateral
Unsecured business loans do not require applicants to mortgage assets as collateral. As a result, it allows businesses to avoid locking their properties. This feature is particularly valuable to new MSMEs that may not have enough assets to mortgage and yet need heavy financial support or critical business machinery.
Fast Loan Application Processes
The process of applying for a business loan is considerably quicker than a secured loan. By eliminating the need for asset evaluation, lenders can disburse funds quickly. This feature allows small businesses to fulfil immediate financial obligations without risking the delivery timelines of their project.
Simple Documentation
Unsecured loans need minimal documentation, like the borrower’s identity proof and income statements. On the other hand, the documentation process to acquire secured loans can be cumbersome. Sometimes, it is complex to prove the ownership and value of the assets pledged as collateral.
Flexibility
Unsecured business loans usually permit flexible repayment terms. This feature is valuable to organisations as it promotes easier financial management by aligning the payment with their cash flow cycle.
Growth Enablement
Unsecured business loans can be instrumental in fielding expansion projects and effectively managing day-to-day operational expenses. Because unsecured finance is quick and uncomplicated to acquire, it provides the necessary push for MSMEs to take on larger projects quickly and even expand operations when required. Unsecured loans provide small businesses the opportunity to reach new heights.
Traditional loans delay capital acquisition and consequently disrupt time-sensitive projects and damage the reputation of the organisation. Such a disruption has a negative financial impact.
Eligibility Criteria for MSMEs to Apply for an Unsecured Business Loan
Several small business owners in India opt for unsecured business loans as a viable and flexible financial arrangement. These business loans help companies keep their projects on track with collateral-free liquidity. Here are some common requirements for MSMEs to qualify for unsecured business loans:
Tenure
Most lenders require at least one to three years of operational history to be eligible. These criteria change from lender to lender.
Age
The age of the business owner should be no more than 65 years, while the minimum age is 18 years. Some lenders set the minimum age criteria to 25 years.
Credit Score
The applicant must have a good credit score to be eligible for an unsecured business loan. This is usually a score of 750 and above.
Minimum Income
To avail unsecured loan options, the business should have an annual turnover of at least ₹40,00,000 for a period of three years. This criterion is subject to change from institution to institution.
Documentation Requirements
- Aadhaar card
- PAN card
- Utility bill
- Bank statement
- Company agreement copy
- Municipal tax bill
- Shares certificates
- Shop act license
- Tax registration certificate (GST)
- Memorandum of association
- Partnership deed
- GST certificate
Conclusion
Unsecured business loans are a viable solution for quick and seamless finance for MSMEs. This powerful tool gives MSMEs a competitive advantage and enables them to navigate market complexities with ease. By using this strategic instrument, decision-makers have the leverage to drive their companies with great confidence in dynamic conditions.
If you are a small business owner on the lookout for easy and quick unsecured business loans, consider Electronica Finance Limited. A regulated NBFC that offers minimal processing time, EFL offers businesses of all sizes a hassle-free borrowing experience.
