If you are the owner of a small business or planning to start a new business, you may require funds urgently at various points of time during its operation. The reasons can range from purchasing a commercial space, expansion of your existing business, a rough patch when there is a decrease in the earnings or dealing with sudden losses that you did not expect. During these circumstances, a collateral free or unsecured loan can provide the much-needed financial support if you do not want to keep any asset as mortgage with the lender. Read on to know how you can get a small business loan without collateral or mortgage.
When you apply for unsecured business loan, it is high-risk in nature for the lender as there is no asset from your end as collateral or security to the lender. The features of these category of loans are:
Lenders process the loan applications on a fast pace
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.
Get 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.
Interest rates on small business loan without collateral
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. For a secured loan for business purposes, you have to offer a collateral. It can be in the form of gold jewellery, property, etc. For this reason, the secured loans generally carry a lower interest rate.
The eligibility criteria may differ between lenders but the standard requirements include:
- You have to specify the category of business. For example, wholesalers, retail traders, professionals, B2B providers, manufacturers, etc.
- The number of years that your business has been operational, like three to five years.
- Some banks or financial institutions may not provide loans to start-ups.
- You should have a robust credit worthiness and excellent financial history of the business.
- Documents to prove 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.
Ways to improve your chances of getting a business loan without collateral consist of the following:
- Visit the websites of banks and financial institutions.
- Compare the repayment rules, 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 of existing loans, etc.
- 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.
A bank or financial institution may ask for certain documents during the process of loan approval that 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
For availing a small business loan without collateral, visit the websites of banks or financial institutions. Go through the terms and conditions, and reviews. Do some research before selecting a lender, go through the eligibility criteria and apply for the loan. Pay back without defaulting to have a good credit score.