Unsecured Business Loans: Meaning , Eligibility ,Types & Steps

Companies that prefer not to pledge their assets as collateral can obtain unsecured business loans. Some examples of unsecured loans are working capital loans and credit cards.

Continue reading to understand how they work and whether your business is eligible for unsecured business loans. 

Meaning of Unsecured Business Loans & Eligibility 

An unsecured business loan doesn’t require businesses to pledge their physical assets as collateral to get a loan. Instead, you can get a loan based on your creditworthiness. 

Creditworthiness measures how likely a borrower is to repay their debts entirely and on time. It depends on factors such as repayment capability, financial history, income, credit score, and debt. A high measure indicates a comparatively lower risk for the lender. 

However, this means the borrowers must have high scores. Accordingly, some lenders may allow businesses with insufficient credit to add a co-signer. 

Co-signing means borrowing a loan together with another person. If the primary borrower defaults on the loan, the co-signer becomes liable to pay. The lender will consider the combined creditworthiness of both borrowers when approving the loan.

If you meet the following criteria, your business will be eligible for unsecured business loans in India: 

• Indian nationality
• The age of business should be at least two years
• Age at the time of loan maturity must be between 24–70
• Credit score > 685

These are the general eligibility criteria and may differ from one financial institution to another. 

Advantages and Disadvantages of Unsecured Business Loans 

One can use unsecured loans to buy machinery, consolidate debt, and meet other expenses. Some advantages include: 

• It is usually processed faster than secured loans because there is no need to evaluate the value of the collateral.
• Unlike secured loans, the lender cannot seize your assets.
• Businesses can enjoy flexibility in choosing the loan amount, interest rate, and repayment period.

However, unsecured loans are riskier for lenders, so can become unfavourable for borrowers:

• If you miss a payment deadline, your credit score could be affected negatively. 
• Lenders require a higher credit score as compared to secured loans.
• It is also why banks ask for higher interest rates than secured loans. 
• Defaulting on the loan may result in legal action from the lender.

Types of Unsecured Business Loans 

Following are the main types of unsecured business loans: 

Working capital loan: Businesses can finance their working capital using these loans. They provide the money upfront which the borrower must return with interest over time. 

Overdraft: It allows you to withdraw money from the bank even if you have negative or zero balance. However, you may have to pay additional fees, penalties, and interest rates on the withdrawal amount. 

Merchant cash advance: The merchant provides you a lump sum of payment in exchange for a percentage of sales or future credit. A portion of your weekly or monthly sales is deducted until the amount is returned. 

Microloans: These are small loans for low-income businesses, typically offered by non-profit organisations. While they have low interest rates, in some cases, they may require collateral or personal guarantee. 

Business credit cards: Small businesses can use business credit cards to meet day-to-day expenses, build credit history, and access perks. These come with a revolving credit limit and you must pay the bills monthly along with interest or an annual fee. 

Government-backed loans: Businesses can opt for several government backed credit schemes such as Start-up India and Pradhan Mantri MUDRA Yojana. The interest rates are comparatively low and you can choose from flexible repyament options.

Steps to Apply for Unsecured Business Loans 

The specific steps could vary depending on the lender, but some general steps to apply for unsecured business loans are as follows: 

Step 1: Check the eligibility criteria by visiting the lender's website

Step 2: Keep important documents handy; you would need documents like address proof, identity proof, bank statements, financial statements, and tax returns, among others.

Step 3: Get the application form, submit it online or offline, and attach your documents. You can also choose a loan amount, repayment mode, and tenure at this stage. 

Step 4: Now, wait for loan processing. Since unsecured loans don’t have much paperwork, these loans are disbursed quickly. 

Loan processing involves evaluating, approving a loan application and disbursing the loan. The lender checks your eligibility and business details, verifies your submitted information, and approves or rejects the loan. 

Difference Between Secured and Unsecured business loans 

Consider that you run a bakery and need funds to buy a new oven for your business. You have two options — unsecured and secured loans. 

If your credit score is good, you can get an unsecured loan in an hour. However, this also depends on the lender. 

But if you choose the secured loan, you must pledge your existing oven (or another asset) as the collateral. You will lose the existing oven if you fail to repay the loan. However, you could get a lower interest rate since the lender has comparatively less risk. 

That said, the following are some other differences between secured and unsecured loans: 

Frequently Asked Questions

What is the limit of unsecured business loans?

It depends on the borrower’s income; you can get a loan of Rs 2 crore.

Are unsecured loans risky? 

Yes, these loans are risky. Risky for lenders because there is nothing they can fall back on if the business defaults, so they raise the interest rates. On the contrary, borrowers must pay higher interest rates at lower borrowing limits and shorter repayment periods. 

Who gets unsecured loans?

Unsecured loans are typically granted to businesses with higher credit scores, good financial history, and sufficient cash flows.