Unsecured business loans are saviours for new businesses who don’t have any collateral to be kept as a security against the loan. These loans come handy when extra funds are required for expansion or working capital requirements. While an unsecured loan sounds too good to be true, one must consider some key factors before going for an unsecured business loan.
- Figure out the requirement of collateral
Getting a loan by keeping any asset like land or machinery as security against the loan puts the borrower at risk of losing it in case he defaults to repay the loan. But, many lenders take your credit score into consideration or don’t give unsecured business loans to new businesses. This could mean that a business loan backed by security is your ultimate solution. However, if you are backed by a strong credit score and have a well-established business, then an unsecured business loan is your best bet.
- The utilisation of Loan amount
Before getting a business loan, one should have a clear vision of how the loan amount will be used. It is imperative to weigh the actual cost of the business loan as it involves you paying interest and additional fees and charges on the loan amount. Thus, having a broader picture helps you to chart out the utilisation of funds and whether the outgoing loan amount outweighs the benefits you will attain from the business loan. If the answer is yes, then an unsecured business loan is the answer to all your needs.
- Figure out your repayment capacity
Unsecured business loans are usually short term and incur a higher rate of interest than the secured business loans. Thus if you are opting for the business loans without collateral, then check with the lender about the EMI which you will be liable to pay every month as part of the repayment of the loan. Evaluate all the costs and whether your income allows you to choose the unsecured loan before plunging into one. Always remember that not paying back the loan EMIs on time can significantly hamper your credit score.
- Personal Guarantee
Though unsecured business loans don’t command the need of any collateral but the lender to be secure and counter his risk asks the borrower to give a personal guarantee which legally authorises the lender to pursue personal belongings of the borrower in case he defaults. Some business owners may not be in the position to take this risk, while some may willingly sign the personal guarantee. Thus, based upon your choice, opt for the unsecured business loan.
The lending market is booming with several lenders who are willing to pay the business loans. It thus becomes imperative to compare different lenders of their offerings in terms of collateral requirement, loan interest rate, loan amount, loan tenure, additional fees, processing charges etc before finally choosing on the one. Fintechs like LoansJagat offers an excellent comparative platform for the borrowers wherein they can get a comparison between different lenders and zero in on the one which best suits their needs and requirements.
Also, it is very important to weigh the pros and cons of an unsecured business loan. It may seem a lucrative deal but sometimes if you don’t calculate all the associated factors, you might be at the losing end. One should weigh the risks and rewards and accordingly decide if you wish to put any asset as security against the loan. If you are sure of rewards from the utilisation of the loan amount to overpower the risk involved, then one may even opt for a putting up an asset as security against the loan.
Digitalisation has brought forth comfort and convenience as one can now apply for an online business loan in India. The business loan application process is fast and the lenders approve the same after validating your business and financial credentials. Unsecured business loans are an excellent way of meeting the expenses of young businesses which require ample funds on day to day basis. Business loan approvals are subject to the jurisdiction of the lender, thus is advisable to comply with their eligibility criteria and documentation requirement to avoid getting the application rejected and having a smooth loan processing.