Collateral Free Loans for Business: Types, Features, Benefits

Entrepreneurs and small business owners with no collateral often use collateral-free loans to expand their ventures. Collateral-free loans can help them meet their working capital needs, purchase equipment, hire staff, and more. They can also help them improve their credit history and access large loans in the future. 

Continue reading to find out the features and benefits of these types of loans. 

Meaning of collateral-free loans 

As the name suggests, businesses don’t need to pledge any collateral or securities in assets like stocks or property while taking collateral-free loans. The financial institute instead grants the loan based on the following factors:

• Creditworthiness
• Credit score
• Business plan
• Financial statements 
• Income source

While you can get a loan without any collateral, you will get a shorter repayment period and have to pay more interest. You can also choose the loan amount, repayment tenure, and mode of payment according to their needs and preferences. 

Features of collateral-free loans 

Besides saving up on collateral, businesses can enjoy the the following features: 

• Loans are given on the borrowers’ reliability with respect to ability to repay the loan (creditworthiness). 
• These loans have shorter repayment terms compared to other types.
• These loans also have a faster approval process since the borrower does not need to evaluate collateral.
• Since these loans do not require your assets as security or collateral, your assets won’t be tethered to them, leaving them free for other uses or loans.

Advantages and disadvantages of collateral-free loans 

Some advantages of collateral-free loans are as follows: 

• Get the loan approved and disbursed faster. 
• No need to risk your assets to get the loan.
• Use the loan amount for any business-related needs. 
• Avail of a flexible repayment tenor and moratorium period. 
• Avail of collateral-free loans worth Rs 1 crore from government schemes such as Credit Guarantee Fund Trust Scheme for Micro and Small Enterprises (CGTMSE).

However, these loans are unsecured for a reason — some disadvantages are as follows: 

• May have to pay a higher interest rate than secured loans.
• Submit more documents and financial statements. 
• May get a face lower loan amount limit than secured. 

Types of collateral-free loans 

Collateral-free, unsecured loans can be revolving or term loans, such as credit cards, personal loans, or student loans: 

• Revolving loan: A loan with a credit limit that can be spent, repaid, and spent again, for example, credit cards and Line of Credit (LC). 
• Term loan: It provides the borrowers a lump-sum of cash upfront, which is paid back as a fixed amount over a certain repayment schedule. Examples include micro loans, and personal loans for business purposes.

Conclusion 

Collateral-free loans offer flexibility and convenience to the borrower, who can use the loan for any purpose and pay interest on the amount used. Plus, they don’t have any limitations on how you use the loan, unlike some secured loans that stipulate the purpose. 

Collateral-free loans can help borrowers achieve their personal or professional goals without hassle.

Frequently Asked Questions

What is an example of a collateral-free loan? 

Credit cards,  student loans or GST based invoice financing are an example of collateral-free loans. 

What is a zero-collateral loan? 

An unsecured business loan given without collateral, such as a security asset like a vehicle or property, is called a zero collateral loan.

 What is the eligibility for collateral-free loans? 

The eligibility varies from lender to lender. However, some general criteria are as follows: 

• Age between 18–65 years
• Indian citizenship
• Credit score above 650 with a clear credit history
• Steady source of income (from job or business) proven via tax returns (individual taxation or GST fillings)
• Proof of identity, address, income
• Bank statements
• Lender’s specific requirements