One of the benefits of secured business loans is their low rate of interest that lowers your EMIs and total interest burden. These loans are sanctioned against a mortgage, which may be one its drawbacks.
Failure to repay the loan can result in the lender seizing your mortgaged asset. The company then liquidates it to cover the losses.
Hence, secured loans can become a risk provided you can keep up with the repayment. The alternative to secured loans is a collateral free business loan.
What are collateral-free business loans?
Collateral-free business loans are easy to get and are unsecured – you can avail these loans without mortgaging any asset.
The risk involved with these loans is considerably high for lenders in this case. There is no asset to liquidate if you default. Hence, they charge a higher rate of interest compared to secured loans.
However, the features of these loans make them more beneficial if you are looking for short-term financing for your business.
Features of collateral-free business loans
High financing to help you with every expense
You can avail up to Rs. 30 Lakh with a collateral free business loan. These loans are unrestricted, and you can use the funds for any expenses.
Fast approval process to reduce your hassles
NBFCs can approve a Business Loan within 24 hours. Thus, you can get the funds in your account quickly to address financial emergencies.
Tenors that help you repay your loan fast
The repayment tenor of a collateral free business loan ranges between 12 to 60 months. Short-term tenors keep your total interest payable, and cost of loan lower than secured loans; however, your EMIs become expensive.
Consider the following example –
You have taken an unsecured business loan of Rs. 30 Lakh at 13% rate of interest for 5 years. Here, Your EMIs will be around Rs. 68,000 and the cost of loan about Rs. 40.95 Lakh.
On the other hand, you have taken a secured business loan of the same amount at 10% rate of interest for 10 years. Here, your EMIs will become approx. Rs. 39,600 and the cost of loan around Rs. 47.57 Lakh.
Opt for a longer tenor unless utterly necessary to keep your EMIs affordable. Otherwise, try to keep your tenors short.
Use a business loans eligibility calculator to calculate your EMIs and choose the right tenor.
Lenders only need you to submit a few documents
You are only required to submit the following documents to apply for a business loan:
Bank account statement of the previous month.
Relevant financial document like Balance Sheet, Profit & Loss Account statement, etc.
Proof of business documents like GST registration, Partnership Deed, Memorandum of Association, Articles of Association, etc.
KYC documents like Voter ID, Passport, PAN, Aadhaar, Driving License, etc.
You have to fulfil only a few eligibility criteria
NBFCs need your business to be at least 3 years old to become eligible for a business loan. You also need to be between the ages of 25 and 55 years.
Another mandatory eligibility criteria that you have to satisfy is a good credit score. Lenders need you to hold a minimum CIBIL score of 750 to apply for such loans.
Having a low debt-to-income ratio is also a plus point. Financial institutions prefer applicants who have a debt-to-income ratio lower than 50%. Foreclose or part-pay your existing loans or clear your credit card debt to lower this ratio.
These features make a collateral free business loan a good option to choose. Make sure to know the answers to the commonly asked questions around these loans before applying.