After sustaining a business for a few years, many entrepreneurs look for means to fund the next stage of growth. Not only this, during an unexpected crisis, funds may be required to keep a business running without crashing. Small business loans come to aid in such scenarios.
Challenges in availing small business loans
Funds are often used by businesses to lease operational space, recruit employees, buy equipment, safeguard inventory, and cover a variety of other expenses. Business loans are vital for expanding an existing venture. Nevertheless, it is often difficult to avail of a loan by pledging an asset as collateral. Lenders may not consider a loan application due to the risks that may be involved. Small business loans are thus not easy to avail.
Several roadblocks may be faced by companies while seeking approval for a business loan. These include poor credit history, lack of a solid business plan, disorganization, limited cash flow, too many loan applications, failure to seek expert advice, and lack of passion to succeed.
Successful approval of business loans
Credit reports are one of the foremost tools used by creditors to estimate the credibility of a borrower. If the credit report indicates a lack of diligence in repaying past debts, it would most likely result in the rejection of a new loan. In addition to this, a well-thought-out plan for the business expansion plan, with adequate financial information and projections will lead to a better chance of a business loan being approved. All the paperwork needed for the loan application must be kept handy without any sloppy bookkeeping. Although finding the best lender to be the best fit for a business may be time-consuming and daunting, complete research about both traditional and alternative loan institutions needs to be explored.
Cash flow is a measure of how much cash is available in hand to repay a loan. It is normally the first thing that loan lenders consider when judging the health of a business. Too many loan applications are regarded as a red flag. Financial advice and guidance from knowledgeable advisors and other business networking groups need to be sought to make sound decisions about a loan. Apart from all these factors, potential borrowers need to have the right mentality when approaching credit bureaus for a loan to fund their company for growth.
Types of business loans
The primary difference between the two is that a secured loan has a mandatory requirement for collateral, that is, it requires an asset to act as security. However, an unsecured loan does not require collateral.
Collateral provides security for the loan creditor if the borrower defaults on a loan and is not able to repay it. Budding business owners prefer small business loans without collateral to fund their dreams of growing their venture. Many Small Businesses fall short on assets that might be given in pledge as collateral. In addition to this, obtaining a secured loan implies putting the asset at risk in the event of being unable to repay the loan on time.
Unsecured business loans
One of the top priorities of Small businesses is finding a no-collateral, or, unsecured business loan. A prime requirement for business growth is to fund the development of their enterprise. Although not as readily available or as easy to find as a standard secured loan, a few business loans not requiring collateral are also offered.
Most unsecured business loans in India are tagged with several business-friendly features. These include competitive rates of interest, prompt disbursal, and flexible repayment options. This results in no-collateral business loans seeming attractive and affordable for many entrepreneurs.
Even though unsecured loans do not specify the provision of collateral, it doesn’t mean that borrowers won’t be required to shoulder a certain level of personal financial responsibility for the business debt. A sound business plan for growth and a decent credit score is mandatory to get speedy approval of such loans. Also, creditors may extract higher interest rates or fees for such no-collateral unsecured business loans. Therefore, before applying for one of these easy business loans, it is critical to do thorough research to know what to expect.
Options for unsecured business loans
Only a few options are available for a loan without assets to be pledged as collateral. The ones that are available may require collateral under a different name. Such loans may be secured by some other means. Very few are completely unsecured.
Security of loans in alternate ways may be done by any one of the options listed below:
· Blanket UCC Lien: In this option, creditors do not ask for a particular asset as collateral. Instead, a blanket UCC Lien is required to be placed on the business. This indicates that the firm’s assets are pursued as compensation if it defaults on its payments.
· Personal guarantee: If the firm defaults on the loan repayment, the individual is required to pay the debt.
Online lenders and sources such as the Small Business Administration provide unsecured business loans. Another upcoming option for procuring business loans with no collateral is peer-to-peer lending.
It is crucial to have a comprehensive understanding of all that is entailed for the business and its owner, before applying for any type of loan.
Benefits of unsecured business loans
Some of the key benefits of unsecured business loans are elaborated below:
- Build Credit History
Going for a collateral-free unsecured loan will make the credit score grow significantly. By being a responsible borrower and making loan repayments on time, a positive impact is made on the credit score. Thus, a good credit score allows small businesses to avail loans quicker, and additionally ensures that entrepreneurs develop responsible financial habits in the long run.
2. Flexible Borrowing and Repayment
Most MSME loans without collateral in India are offered with flexible borrowing plans. The implication of this is that the creditor approves a credit line for the business based on its previous credit history at the beginning. So, funds may be secured as and when needed through this pre-approved credit line. One of the most noteworthy benefits of this flexible borrowing system is the fact that funds as much or as little as needed may be borrowed. Also, interest is needed to be paid on the amount borrowed and not the entire credit line.
Apart from flexibility in borrowing, most credit institutions also grant the added benefit of a flexible repayment plan. Longer tenures and the option to choose the date of repayment in addition to the EMI amount are presented as their advantages.
3. Quicker Approval
Fast approval is one of the biggest advantages of an unsecured business loan. Time is not spent on the evaluation of assets, as the credit score is the only factor that is considered by lenders. Credit rating agencies make the process of determining credit scores quite easy for creditors. Hence, such loans are approved at a fast rate.
4. Competitive Interest Rates
Owing to the rapid growth of the lending industry in the country, a consistent increase in the number of lenders is being witnessed. Due to this, fair competition is enforced, lowering the interest rates for potential borrowers. Financial institutions are also better equipped with expert technology to analyze and predict the risk linked with a loan offer. They are therefore able to present better rates of interest.
Without the obligation to pledge any collateral, unsecured business loans enable entrepreneurs to invest in their business without any financial worry and work towards scaling it to new heights.