Every MSME owner sometimes needs small business loans to fulfill their business needs and expenses. Getting a small business loan is also sometimes hard as the lenders expect collateral to be pledged to process the loan.
Some business owners use this opportunity as a strategy and pledge their property, house documents, machinery, or any other form of asset as collateral so that they can get a business loan with lower interest rates with good terms for higher loan amounts.
However, there are a few ways a small business owner may apply for a business loan without even having to pledge any collateral.
Let’s discuss on;
- What does a Small Business Loan Without Collateral refer to?
- How can Small Business Loans without Collateral or Unsecured Business Loans support SMEs?
- 5 kinds of collateral-free small business loans.
What does a Small Business Loan Without Collateral mean?
If the owner of MSME is applying for a sme loan and not pledging or submitting any kind of property documents, house documents, machinery, or any form of assets as collateral, then the small business loan is not known as an unsecured small business loan or small business loan without collateral.
The banks and the NBFCs approve business loans on the basis of credit history or CIBIL score, past and future performance of the business, and goodwill of the borrower too.
Benefits of an Unsecured Business Loan
No Asset Risk
As you are not pledging your assets, you do not fall into risk of losing them if you are unable to pay the loan amount for some time. But there might be other ways where a lender might sue you for failing to clear the loan amount.
Faster Loan Processing
Lenders like banks and NBFCs have to take some time to analyze the value of the asset pledged and decide on the business loan. Business owners sometimes lose market opportunities while waiting for the business loan to process. But in the collateral-free small business loan, the lenders will analyze your credit history, bank statements, vendor bills, and the past and present performance history of the business digitally which makes it easier and faster to process the loan, where it also helps the business owner to grab the market opportunities.
Limited Documentation
By applying for an unsecured business loan the lender seeks minimum documents like business owner KYC, GST, business registration certificate, bank statements, vendor or firm bills, and other necessary documents, which are mostly readily available with most of the small business owners.
Suitable for Small Businesses
Indian MSMEs, especially Small businesses, rarely have assets that can be pledged as a form of collateral or guarantee. Unsecured loans thereby allow them to access finance without using such resources or assets.
Credit Building
Repaying an unsecured loan on a timely basis according to the schedule will help improve the credit of a business and build the trust towards you by the lender, which can increase its chances of being lent money more easily or on better terms while applying for a business loan next time.
Let’s discuss five different types of small business loans without collateral.
1. Government Schemes for Small Businesses
In India, several government-backed programs are designed to help small business owners access finance without requiring any collateral.
Below are a few popular schemes:
- MUDRA Loans: Paise through Pradhan Mantri Mudra Yojana (PMMY). Applying for a business loan under this scheme will be quite helpful for small business owners as this scheme provides loans without any collateral up to ₹10 lakhs.
- Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE): The government actually provides credit guarantees to banks and financial institutes through this scheme. Because of the credit guarantee, they are able to provide loans to small businesses without any requirements of security or collateral. Below are a few of the financial institutions that provide business loans under this scheme;
- HDFC Bank Ltd
- ICICI Bank Ltd
- IDFC First Bank Ltd
- L&T Finance Ltd
- Bajaj Finserv Ltd, etc.
Government schemes generally have lower interest rates and easier repayment conditions compared to private lending institutes.
2. Unsecured Business Loans from Banks
There are banks where that provide small business loans to the MSMEs by considering the business’s past and future performance, CIBIL score, etc.
3. Online Lending Platforms (Fintech)
Applying for a business loan via Fintech companies’ primary help is that they have quick turnaround times, which can approve loans in as little as 24 to 48 hours. Many fintech platforms borrow based on cash flow and performance of the business, not by collateral. Interest rates tend to be higher, and it is recommended that all small business owners should compare lenders before making a decision.
4. Business Credit Cards
Another way to get funding without collateral is through the use of a business credit card. Credit cards often are offered by banks, especially for small businesses that come with a pre-approved credit limit. These credit cards can help to cover day-to-day expenses and short-term financial needs. Business credit cards may be a great way to manage cash flow, but it is recommended that MSME owners use them wisely to avoid high interest rates and late fee charges.
5. Peer-to-Peer (P2P) Lending
In India, Faircent and LenDenClub are some of the P2P lending platforms that provide small business owners with options to obtain P2P lending. Usually, it goes faster than the procedures followed by banks, and P2P lending portals are likely to be softer in their attitudes to lending to businesses that come up with less-than-perfect credit scores and these lenders do not require any collateral for a small business loan.
However, interest rates on such loans will likely be higher, and the amount borrowed is typically smaller. P2P lending is an important alternative for small businesses.
Conclusion
Though interest rates may be a little steeper, there are a variety of routes available for small business owners through government schemes, platforms offered by fintech, and P2P lending for collateral-free loans. MSMEs need sources of funds that provide flexibility and easier access to finance both to meet financial requirements and to seize growth opportunities. This helps entrepreneurs choose the right alternative to meet their business requirements.
In addition, Small business loans without collateral can also be obtained through NBFC. The NBFCs offer loans with digital platforms and simplified loan approvals that result in faster disbursals without taking any collateral. Digital-first, the process not only cuts on the traditional paperwork but enables small businesses to get the funds in quick time and thereby manage their operations and scale up with ease.