7 Reasons Why Unsecured Business Loan Helps Small Business Grow Faster

Unsecured business loans refer to those loans lent without the need for collateral. Many banks and Non-Banking Finance Companies let the borrowers take credit without security. Unsecured business loans help one to develop their business in many ways.

Let us have a look at the ways how unsecured business loans help the business grow faster.

1.    Flexible Tenure:

Unsecured business loans have a flexible tenure option. The tenure for repayment is usually short and ranges from 12 months to 36 months. This flexible tenure choice enables the borrower to pay off the debt in a shorter time frame.

2.   Improves Credit: 

One of the main parameters to measure the credit score is the repayment tenure. Since unsecured loans come with shorter repayment periods, it helps improve the credit score. This improved credit score can help get a business loan in the future with lower interest rates.

3.   Provide Working Capital:

A significant challenge faced by smaller businesses is the lack of liquid assets. The businesses require a continuous flow of funds to cover their working capital expenditure. A lack of funds to meet the day-to-day expenditures can put one's business at stake. Unsecured business loans offer relief in situations such as this when a shortage of funds is required immediately.

 

 

4.   Quicker and Simple Approval Process:

Banks and NBFCs accept applications for unsecured business loans from the requesters online. Once the request is processed, and the documents are verified, the loan amount is disbursed to the borrower. This provides faster funds to the borrowers in case they require emergency funds. 

5.   Less Risk to the Borrower:

Since the borrower need not pledge an asset as a security, it means that if the borrower defaults, their business or personal property is not at risk. In addition, many startups do not have any assets to pledge as collateral initially. Hence, they can take unsecured business loans to fund their business. 

6.   Less intensive Formalities:

Business loans usually require a lot of documentation and verification. The amount of documentation increases with secured business loans as they need to validate the documents related to the assets pledged. Since unsecured loans do not need security, the verification part is reduced. Apart from this, with the use of the latest technology, parts of the verification are automated. This makes the whole process quicker and easier.

7.   No Sharing of Proprietorship:

Most businesses in their initial phase depend upon venture capitalists and angel investors for their setup and expansion. This leads to a part of the business being under the investor's ownership. This can take a good share of the startup away from you. Thus, it is advisable to lend money through unsecured business loans, improving your credit score and not requiring collateral.

Thus, unsecured loans are a savior for startups and small businesses to improve their business without losing an asset. This has indeed helped businesses improve their credit score, making it simpler for them to take loans in the future. Banks and Non-Banking Finance Companies have made it simpler for small businesses to access unsecured business loans.

 

FAQs

1.      What happens if an unsecured business loan defaults?

Even if no collateral is being pledged with the loan, it does not mean that the loan can default. However, the lender can take legal actions against the borrower if defaults.

2.     How is an unsecured business loan different from a term loan?

A term loan is a secured loan that requires one to pledge collateral to get the loan. Whereas, in an unsecured business loan, one need not give an asset as a security.

3.     Can a person repay the unsecured business loans earlier than the tenure?

Yes, the borrower can repay the loan any time before the end of the tenure. The borrower has to keep in mind that the loan should be paid within the tenure. Otherwise, they would be facing legal action.

4.     Do unsecured business loans affect the credit score?

Unsecured business loans can indeed affect the credit score. If the loan is repaid promptly, it helps in improving the credit score. On the other hand, if the loan defaults, it will harm the credit score.

5.     Does credit score affect future borrowing?

Yes, credit score affects future borrowing. A CIBIL score of above 750 is regarded as a good one.

 

 

6.     Is it difficult to get an unsecured business loan?

It is not so difficult to get an unsecured business loan, provided you have all the required documents and you do not have a history of default.

7.     How can one acquire a good business loan?

One can get an unsecured business loan from banks. Apart from this, Non- Banking Financial Companies lend money through unsecured business loans. There are a lot of schemes from the government as well to provide unsecured business loans to encourage more startups.

8.     Why do unsecured business loans have high-interest rates?

As the loan is lent without collateral, the risk for the lender is higher. This is the reason for higher interest rates in unsecured business loans.

9.     What is the limit set for unsecured lending?

The limit of the amount lent through unsecured business loans is decided based on the turnover of the business, CIBIL score, and profit.

10.  How to apply for unsecured business loans?

One can physically go to the organization that lends the loan. Additionally, one can apply for the loan online and submit all the necessary documents. Once all the validation is complete, the loan will be sanctioned.