The Confederation of Indian Industries states that almost 63.4 million MSME units contribute to 6.11% of the manufacturing GDP and 24.63% of the GDP from service activities.
One of the primary reasons of 12-15% YoY growth of the start-up scene in India is due to the easy availability of a loan for business without security, which enables financing smooth daily operations and expansion.
Such credit lines are extremely popular among MSMEs since small companies are often ‘asset-light’ and cannot pledge collateral for secured loans. Moreover, the standard turnover criteria set by financial institutions can also undeservingly pronounce them uncreditworthy.
Nonetheless, mentioned below are some options through which businesses can avail funds from lenders without pledging collateral.
Types of loan for business without security
- Term loan
One of the most popular types of unsecured business loan offered by financial institutions is a term loan. While these loans can be secured or unsecured, in both cases the amount is decided by the business’ credit history.
Usually, term loans are availed to meet specific requirements, like capital expenditure or market expansion. In effect, such credit lines have a fixed tenor, and the lender disburses the lumpsum amount.
- Working capital or business loan
Working capital loans are usually availed to meet the financial requirements of businesses pertaining to their daily operations. It balances the cash flow required to run a business and overcome cash shortages, especially during increased seasonal demand and off-season shortcomings.
Increasing market traction while meeting short term requirements is one of the most important reasons why you should choose a working capital loan to fund business operations.
To plan out the repayment schedule, one can use a business loan calculator and estimate the monthly EMI outgo. With adequate planning, one can repay the debt comfortably without stressing monthly finances. Moreover, to further expedite the loan application procedure, popular financing institutions like Bajaj Finserv extend several pre-approved offers to their customers. Such offers can be availed on products like credit cards, business loans, personal loans, etc. You can check your pre-approved offer by entering a few essential details like name and contact information.
- Invoice financing
This type of credit line is best suited for companies that face a significant delay between raising invoices and receiving payment for the same. A fintech corporation extends a loan based on the amount generated in the invoice.
Typically, the lender finances up to 80% of the invoice amount. The debt repayment of loan for business without security starts as soon as the company raises funds on the invoice based on predetermined rates and tenor.
- Start-up loans
For new business ventures, a start-up loan can help meet the short- and long-term financial requirements to fund daily operations and expansion. Since start-ups do not usually have a strong business credit vintage, lenders often consider the applicant’s personal economic activity along with that of the company.
Typically, current dealings and turnovers decide the business loan amount, tenor, and interest rate applicable. Applicants often have to submit a proof of establishment and partnership to be eligible for the loan.
- Business credit card
While a business credit card may not be the first option that comes to mind, it is still a great way to avail a loan for business without security and meet short-term requirements. A business credit card can be one’s go-to option if he/she wants to pay for short-term requirements and earn reward points.
Customers should also enquire regarding several initial offers extended to attract more borrowers. However, note that the interest rates, in this regard, might be higher than other traditional business loans.
When approaching a lender for any of the credit types mentioned above, having a record of proven cash flow, along with a solid business idea outlining its growth potential is often considered as selection criteria for business loan application approval. So, business owners need to have a good idea of market traction and plan their pitch accordingly.