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An entrepreneur with dreams requires an unsecured business loan to achieve a milestone in his business through finance. An unsecured loan helps you meet all the financial requirements of a business for various purposes, including refurbishing your business, increasing the working capital, purchasing new machinery, etc.

What Is an Unsecured Loan?

An unsecured loan is a type of loan where you need not pledge any collateral to the Bank or Non-banking Financial Institution. So, based on what criteria is this type of loan provided? Unsecured business loan eligibility criteria include a good credit score, documents submitted, income, etc.

Types of Unsecured Business loans

Here are some of the common types of unsecured business loans:

  1. Term loan: It is any loan taken for a given period and repaid in monthly installments (EMIs) in a fixed timeframe. They are usually taken for one-time needs like capital to purchase a building or a piece of equipment or land. They have short tenures, and there is no collateral involved.
  2. Line of credit or overdraft: This type of unsecured business loan in India is flexible and allows you to withdraw money multiple times. You can repay the interest for the amount you withdrew, which is typical for periodic business payments.
  3. Working Capital Loan: This type of loan is secured to meet day-to-day expenses in your business and is based on your credit score and your repayment capacity.
  4. Government Scheme Loans: The government of India has taken several initiatives like a Start-up scheme for unsecured business loans for start-upsMudra loanStandup India, Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), Prime Minister Employment Generation Program (PMEGP), SIDBI’s Loans in 59 minutes, are some of the scheme loans to develop business in various economic sectors of India. They provide unsecured loans with minimum interest to small businesses and start-ups in India.

What are the Features of Unsecured Business loans in India?

Features of unsecured business loans vary depending on the bank. However, some standard features are: 

  1. Unsecured loans do not require any collateral.
  2. The basic parameters considered by the provider are the creditworthiness and the repayment capacity of the applicant.
  3. According to most financial institutions, your business should have been in operation for two years at least to secure a business loan.
  4. The minimum loan amount is 10,000 INR, while the maximum is 50L INR depending on the business size and need.
  5. They have a flexible tenure ranging from 1-5 years and sometimes more than that.

Interest Rates of Unsecured Business Loans

Currently, the interest rates for unsecured business loans offered by banks and Non-Banking Funding Companies (NBFCs) are starting from 14.99% per annum. The Unsecured Business loan interest rates depend on the following factors:

  1. The financial history of the applicant
  2. Credit score 
  3. Repayment capacity
  4. Creditworthiness
  5. Loan amount
  6. Annual turnover of the business or monthly income, and
  7. Business requirement

Difference Between Secured and Unsecured Loans

Some of the common points of difference between secured and unsecured loans are:

  1. Unsecured business loans do not require collateral, while secured loans do.
  2. Since unsecured loans do not require pledging collateral, their interest rates are comparatively higher than that of secured loans.
  3. Secured loan amounts depend on the value of the collateral, whereas unsecured loan amount depends mainly on your credit score.
  4. Unsecured loans are sanctioned faster as there is no need to go through asset-related documents.
  5. In case of any defaults, in unsecured loans, your credit score will be negatively impacted, while in secured loans, your collateral will be used to clear your debts.

What are The Eligibility criteria to get an unsecured business loan?

The following are the unsecured business loan eligibility criteria:

  1. It would be best if you are of Indian nationality
  2. Your business should have been in operation for at least more than 2 years.
  3. You should be between 24 to 70 years of age. (70 at the time of loan maturity)
  4. You should be self-employed, i.e., owning a business.
  5. Your credit/ CIBIL score should be 685 or higher.

What Are the Documents Required?

The lender will require you to submit the following documents to lend you an unsecured business loan:

  1. KYC documents of borrowers and guarantors
  2. Bank statements of your previous business transactions 
  3. Documents to show your credit history
  4. GST returns of the financial year
  5. Ownership document of business, and
  6. The list of shareholders/ partners (if applicable)

How to apply?

Here is how you apply for unsecured business loans in India. 

  1. Check the eligibility criteria and make sure you meet them.
  2. Get the application form from the bank or online and fill it out. Some banks offer e-mail services too.
  3. Fill in the necessary details.
  4. After filling out the form, submit the documents mentioned above.
  5. Then you get to choose your unsecured loan amount plan and tenure as per your requirement.
  6. Read well through the terms and conditions before accepting them and closing the application.

The Bottom Line

So, if you are looking to expand your business, low-key, unsecured business loans are always here to give you a helping hand. Unsecured business loans for start-ups in India are especially fruitful.

Unsecured Business Loan FAQs:

You repay by monthly installments (EMIs). Some banks offer ACH (Automatic Clearing House) facilities. Contact your bank to know if you can avail of this facility.
Yes, there are several schemes from banks and NBFCs that offer business loans with special perks for women entrepreneurs.
You can settle your total loan amount before the end of your tenure. However, you have to pay at least 6 EMIs before opting for foreclosure. Some banks offer them free of charge, while the other takes 4%- 5% of your loan amount as a charge.
Lending institutions prefer credit scores between 750 and 900.
10L INR per annum for 2 years is mandatory to avail an unsecured business loan for businesses in Bangalore.

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