Everything You Need to Know About Getting A Small Business Loan Without Collateral

A business may require additional funds at various points of time and the requirement can be sudden and urgent. Sometimes, a business can go through a rough patch, incurring a decline in revenue or losses. There can be several other reasons like business expansion, up-gradation of technology, or an increase in inventory, which might call for funding.

In such situations, you can apply for loans to meet your requirements. There are two types of loans that you can avail-secured and unsecured. However, the quickest way to raise funds is to apply for a business loan without collateral.

How Does It Work?

A collateral free loan for business is a low-risk loan. You do not have to offer any asset as collateral or security to the financial institution.

Usually, the loan applications get processed quickly. There is no asset to evaluate, and if you are eligible, the funds are credited to your account within a short period. It is a flexible loan, and you can use the funds for a variety of purposes.

You also have the option to choose your repayment tenure. One condition is that the repayment should be within the limits that the lender specifies. The interest charged on such loans tends to be slightly higher than that on secured loans. This is because you do not provide any guarantee of repayment.

Also Read: What Are the Benefits of Unsecured Loans for Your Small Business

Eligibility Criteria

The eligibility criteria for a small business loan without collateral may vary across different lenders. There are certain common conditions that all lenders might adhere to:

• Lenders usually specify the category of business. For example, wholesalers, retail traders, professionals, B2B providers, manufacturers, etc.
• The number of years that the business has been operational, like three to five years.Some financial institutions may provide loans to start-ups while others do not.
• Robust credit history of the business owner and excellent financial history of the business.
• A proof that the business is feasible, projected cash flows for the next couple of years, its financial viability, etc.
• The details should be presented in the form of a business plan or some other document.
• Turnover of the business for the past few years.

You can get an idea about the eligibility criteria from the lender’s website too. If you do not meet the eligibility criteria, then you can either take the necessary measures to meet the eligibility requirements.

You have to prepare cash flow projections, business plans, a feasibility study and get your financial statements audited. You should also make sure that you have a good credit score. This can be done by making your payments on time, for credit card bills, monthly loan instalments, etc.

In case of new businesses, it is better to apply for a secured loan. If you have gold or property to pledge, you can offer that as collateral. The secured SME loans generally carry a lower interest rate.

Also Read: Know About the Application Process of Unsecured Business Loan

Documents Needed for Loans for Small Business Without Security

When you are applying for an unsecured loan, the financial institution may ask for certain documents, which includes:

• Completed application form.
• Business licence or registration document.
• Borrower’s and guarantor’s KYC documentation.
• Past 6 month's account statements.
• Profit and loss statement and balance sheet duly audited.
• GST statement of the previous financial year.
• List of current loans and working capital.
• For private limited companies, the lender may ask for the list of directors and shares held by them.

Also Read: 3 Ways To Finance Your Small-Scale Business

Advantages of Without Collateral Loan for Business

Unsecured loans have several benefits for small businesses:

• You do not stand the risk of losing your asset if you are not able to repay the loan amount.
• Processing of the loan and approvals happen quickly once you meet the eligibility criteria.
• This is a good opportunity for you to build a good credit history. You just have to make sure that you pay the monthly instalments on time.
• The loan amount is not limited by the value of any asset as there is no collateral provided.

Selecting A Lender

You can visit the website of the financial institutions offering loans online. By doing a little research, you can get the list of lenders, the terms and conditions, and reviews left by other customers. A friend or family who has taken loans without collateral may also provide useful feedback. Finally, you have to compare the repayment rules, interest rates, the loan terms and then select a lender.

How to Get a Business Loan Without Collateral with Ease?

In order to get a business loan without collateral smoothly, focus on the following parameters.

• Creditworthiness

  One of the most crucial factors affecting your ability to get a loan without collateral is your creditworthiness. Lenders will look at your credit score, credit history, and other factors to determine whether you are a good candidate for a loan. If your credit score is low, getting a loan approval becomes challenging.

• Business revenue

  Revenue indicates whether or not your company generates cash from its operations. Lenders primarily attempt to track your company's revenue via sales. A solid revenue and profit margin facilitate no collateral business loan approval.

• Time in Business

  Business vintage is another crucial aspect. The older your business, the easier it is for the lender to track how you manage your profit and expenses, as well as how delinquent you were in meeting investor expectations. Generally, lenders prefer to work with businesses that have been in operation for at least two years.

• Industry and Competition

  The industry and competitive landscape in which your business operates can also affect your eligibility for a collateral-free loan. If your business operates in a highly competitive industry or has a lot of competitors, lenders may be hesitant to offer you a loan. The reason for this is the possible impact on sales.

• Funding Amount and Repayment Terms

  The amount you are seeking to borrow and the repayment terms you are seeking can also impact your eligibility for a collateral-free loan. If you are seeking a large loan amount or a longer repayment period, lenders may be more hesitant to lend to you without collateral.

• Economic Conditions

  Economic conditions can also affect your eligibility for a collateral-free loan. If the economy is in a downturn or there is a lot of uncertainty, lenders may be more cautious about lending money without collateral.

• Financial Statements

  Lenders will also look at your financial statements, including your balance sheet, income statement, and cash flow statement. These statements will give lenders an idea of your business's financial health and ability to repay the loan.

• Business Plan

  Finally, lenders will want to see a detailed business plan that outlines your goals, strategies, and financial projections. A well-crafted business plan can demonstrate to lenders that you have a clear plan for how to use the loan funds and generate revenue to repay the loan.

Also Read: Why Should Small Businesses Consider Getting a Loan without Security

To Conclude

An unsecured business loan is just what you need if your business is new or you do not have assets to pledge or you do not want to put your assets on line. However, keep the eligibility criteria in mind, compare different lenders, and then go for one that suits your needs the best. Make sure you have a practical repayment plan in place, so that your credit score gets better and you can give your business the required boost.

Disclaimer: This post was first published on 12th May 2021 and has been updated for the latest information, freshness and accuracy.