5 Steps to Getting a Small Business Loan Without Security

Want to launch a new marketing campaign to tap into unexplored markets or purchase equipment to increase production? Or is it a digital transformation of your business on your mind? Whatever it is, you must not let insufficient funds come in the way of your dreams for your business, especially when you can apply for an unsecured business loan to meet your financial needs. Today, many small and medium-sized businesses are availing unsecured business loans to help them grow and expand.

What is a collateral-free business loan?

A collateral-free business loan is granted by financial institutions to new, small and medium businesses without any security or tie-up with asset belonging to the borrower. Besides, it is processed faster, usually within 48 hours, compared to a secured loan. The funds can be utilised for a wide range of business purposes such as marketing, upgrading equipment, renovations, hiring staff and leasing additional space.

An unsecured business loan is generally a short-term loan with repayment options of up to 36 months. It also offers certain flexibility to the borrower to choose the repayment schedule. The unsecured business loan interest rate tends to be slightly higher than that of a secured loan as the risk is relatively higher for the lender.

Advantages of an Unsecured Business Loan

A collateral-free business loan offers many advantages:

  • No collateral means no risk to assets

  • Quick processing

  • Flexible repayment options

  • Loan size is not limited by an asset or a collateral

  • Few restrictions on how to use the loan funds

  • Allows availing of revolving credit or unsecured line of credit

Not tying up an asset as a guarantee or repayment for the loan does not make availing an unsecured loan any more difficult than usual secured loans. While the lender may consider many factors before processing the loan, the most important one is the creditworthiness of the borrower. The complete credit history, encapsulated in the credit score, is very important for the financial institution. They will check how regularly you have repaid your credit card bills and loan instalments, what are your existing loans, your income etc. Their decision to grant you the loan or not will be based on these factors.

Wondering how to apply for a collateral-free business loan? Here are the steps you need to take:

1. Check and Build/Fix your Credit Score

You can easily check, build and fix your credit score online. While many credit-rating agencies offer free credit scores, some need you to make a small payment for the service. A credit score, generally, is a three-digit score ranging from 300 to 900. The score displayed in green means a good score and lending institutions will be predisposed to approve your loan. Many credit-rating sources also mention if you are generically eligible to apply for a credit card, personal loan and so on. Of course, certain lenders may have specific requirements. If your score is in red, you need to take measures to improve it. Check if any monthly instalments are pending and make sure you pay them. Have a healthy mix of credit—secured and unsecured. Too much unsecured debt may not look good on your report. Apply for fresh credit only if it is absolutely necessary. Build a good credit history slowly and steadily. It may take some time but is possible with determination.

2. Determine the Exact Purpose of your Loan

What exactly do you need the funds for? It could be any of the following:

  • Meeting daily expenses

  • Improving inventory

  • Upgrading equipment

  • New marketing campaigns

  • For a financial backup

  • Digitalisation of your business

Be clear about why do you need funds and how much will be enough. Before applying for one assess if the need is pressing, especially since the business loan interest rate will be higher.


3. Create a Cash Flow Projection Chart

This is very important. A fair idea of your cash flows will help you determine if you will be able to pay off the loan amount in time. Not doing so will attract penalty and besmirch your credit history and reputation. This also means you will not be able to get loans in the future, making things even more difficult for you.


4. Draft a Business Plan

It is critical to have a decisive plan that is thorough and in-depth. Your lender may be impressed if you take the effort of working out and drawing up a blueprint showcasing everything about your business. This should include the purpose of your business, your goals, how you plan to bring in the income, the current cash flow, the projections, all your financial documents and statements, how exactly you plan to use the loan funds and how it will benefit your business in the future.

5. Compare Lending Institutions

Many financial institutions offer collateral-free business loans to small businesses. Do your research and check their websites to know the salient features of the loans offered by them, such as how quickly they process loans, how flexible they are, the maximum amount offered, the loan tenure and their business loan interest rate. Make sure to carefully scrutinise the terms and conditions of each lender before choosing one to meet your business needs.

What is Next?

Once you have finalised the financial institution from where you want to borrow, you can simply apply online. Ask for a representative to call you or visit their centre. Apply for the loan after discussing all the details thoroughly.

The lender may ask you for some additional documents such as:

  • KYC documents

  • PAN card of business

  • Audited financial statements of the previous few years (this number may vary from lender to lender)

  • Proof of address

  • GST returns

  • Rental/lease or related property documents

  • Bank statements

  • A statement of existing loans

An unsecured business loan can be a blessing for small business owners as they do not have to tie-up an asset as security. This could be your best option if you are in urgent need of funds to grow your business. Just make sure that you have sufficient cash flows in the future to repay the loan on time or you will be stuck with a business loan with a high interest rate. Choose your lending institution wisely and avail only as much as your business actually needs and you could be well on the way to quick business growth.

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