You may require additional funds urgently for your business at various points of time during its operation. The reason can be that your business is going through a rough patch and there is a decrease in the earnings or sudden losses that you did not expect. There can also be other reasons like you are planning for a business expansion, up-gradation of technology or increase your stock of inventory. During these circumstances, you can apply for loans to meet your requirements. Read on to know how you can get a small business loan without any collateral or mortgage.
A collateral-free loan for business is low-risk in nature. You do not have to offer any asset as collateral or security to the lender. The features and benefits of this category of loans are:
Fast processing of loan applications
Usually, the lenders process the loan applications quickly. They do not have to evaluate any asset and if you are eligible, they would approve the loan amount within a short period of time.
Variety of use
It is a flexible loan and you can use the funds for a variety of purposes. Also, the loan amount is not limited by the value of an asset as you are not providing any collateral.
Flexible repayment tenure
You also have the option to choose your repayment tenure or period. The condition is that you should pay back the loan with interests within the time limits that the lender specifies.
Small business loan interest rates
The lenders generally charge an interest rate on such loans that is slightly higher than that on secured loans. This is because you are not providing any guarantee of repayment. If you are applying for a secured loan for business purposes, you have to offer collateral. It can be in the form of gold jewellery, property, etc. For this reason, secured loans generally carry a lower interest rate.
No risk of loss of assets
You are not keeping any collateral while applying for the loans, so there is no risk of losing your asset if you are not able to repay back the loan amount.
Improve your credit history
This is a good opportunity for you to create a good credit history. Just make sure that you are paying the monthly instalments on time during the entire loan tenure.
Unsecured loans or a loan without collateral is one of the quickest ways to arrange for funds for your business but there are certain eligibility criteria. These criteria may differ between lenders but the standard requirements may be:
- Lenders have to specify the category of business. For example, wholesalers, retail traders, professionals, B2B providers, manufacturers, etc.
- The number of years that the business has been operational, like three to five years.
- Some banks or financial institutions may not provide loans to start-ups.
- The business owner should have a robust credit worthiness and excellent financial history of the business.
- Proof that the business is profit making, projected cash flows for the next couple of years, its financial viability, etc.
- You may have to present the details of using the loan amount in the form of a business plan or some other document.
- Disclose the turnover of the business for the past few years.
How can you improve your chances of getting a business loan without collateral?
- You can visit the websites of banks and financial institutions. Get the list of lenders, the terms and conditions, and reviews left by other customers. A friend or family who has taken loans without collateral may also provide useful feedback. Finally, compare the repayment rules, business loan interest rates, the loan terms and select a lender.
- Prepare cash flow projections, business plans, a feasibility study and get your financial statements audited.
- Ensure that you have a good credit score. You can do this by making your loan payments on time like the credit card bills, monthly loan instalments, etc.
- You can find out the eligibility criteria for unsecured loans from the lender’s website. If you do not meet the eligibility criteria, you can take the required steps for being eligible.
Documents that you have to submit for a small business loan without security
A bank or financial institution may ask for certain documents during the process of loan approval. The document requirements may vary between lenders but usually include the following:
- An error-free and filled up application form
- Your business licence or registration document
- You have to get a guarantor for the loan and submit your and the guarantor’s KYC documents
- Submit your id and address proof like pan card, Aadhar card, electricity bill with your name, bank pass book, etc.
- Past 6 months’ bank statements provided by your bank
- Duly audited profit and loss statement and balance sheet of your business or small business enterprise (SME)
- GST (goods and services tax) statement of the previous financial year
- A list of your current loans if any and working capital
- If you have a private limited company, the lender may ask for the list of directors and the value of shares held by them.
What happens if you default on an unsecured loan?
If you are not able to repay back the loan, your lender cannot claim any property. However, he can take measures like appointing a recovery agency to collect back the debt. He can file legal charges against you and if the court rules in the lender’s favour, you have to pay back from your income or other methods. The court may place a lien on your house if you are the owner. All these would have a negative effect on your credit score.
If you require a business loan without collateral, visit the websites of banks or financial institutions. Do some research before selecting a lender, go through the eligibility criteria and apply for the loan. Repay back on time to have a good credit score that would help you in future.