Why Unsecured Business Loan Is A Better Option For Small Businesses

Small and medium enterprises form the backbone of the Indian economy. They employ a significant portion of the country’s workforce and are the key to solving the unemployment problem. However, these small businesses often need to take loans to fund their working capital flow, which is essential for their survival. By offering credit in the form of business loans, many financial institutions have stepped up to help these small and medium industries. These business loans are available in two forms—secured loans and unsecured loans.

Most businesses prefer unsecured business loans because then they do not have to pledge their assets as security. Therefore, from the borrower’s perspective, unsecured businesses loans are considered safer and more secured than secured loans.
 

Here are Some of the Major Benefits of Opting for Unsecured Business Finance

 

Less Risk to the Borrower

The primary difference between a secured and an unsecured business loan is the collateral. Secured business loans require the borrower to pledge their asset as security, which means less risk for the lender. Unsecured business loans, on the other hand, do not require the borrower to pledge any collateral as security, which means that if they default, their personal or business assets will not be at risk. Now, most start-ups do not have assets to pledge as security. So, they mostly make use of unsecured loans to fund their business needs.
 

Flexible Tenure

Unsecured small business loans in India come with a flexible repayment tenure option. Usually, the loan is available for a short duration. With most financial institutions, the repayment term ranges between 12 and 36 months. The flexible tenure helps business owners to pay off their outstanding balance in a short period while keeping their budget intact. The shorter and flexible loan tenure also allows borrowers to maintain positive cash flow.
 

Quicker Processing and Less Intensive Documentation

The business loan disbursal process usually takes time because the lender has to carefully vet every aspect of the application such as the borrower’s financial condition, business reports, plans etc. This is more so in the case of secured business loans as the borrower has to furnish additional documents in terms of asset papers and the lender has to evaluate the value of the collateral before determining the amount of loan to be granted. This is a lengthy and time-consuming process. The unsecured business loan disbursal process is relatively easier and faster.
 

Provide Working Capital

One of the key business challenges faced by small business owners is a liquidity crisis. To run their business operations smoothly, businesses require funds to cover their working capital requirements. Having appropriate working capital can assist firms in meeting diverse needs such as creditor liabilities, utility bill expenses, inventory purchases, and so on. Given this, putting your company's assets on the line to get a secured MSME business loan for a short-term requirement isn't a good idea. This is where an unsecured short term loan for small businesses comes in handy.
 
ALSO READ: 5 Ways a Healthy Working Capital Flow Can Boost Your Business
 

Variety in Unsecured Business Finance

Thanks to advances in technology, unsecured business loans can be availed in the form of an overdraft facility, term loans, business line of credit, business credit card, and more.
 

Flexibility in Usage

For businesses, the need for funds is never-ending. You never know when or for what your business will need money. You may require immediate funds for the acquisition of machinery, to meet overhead expenses, to pay utility bills, or for any other such reason. Therefore, choosing an unsecured business loan in India makes sense because it allows you greater flexibility in terms of usage. Most lending institutions don't even inquire about the borrower's plans for the funds. Simply check your favourite lender's unsecured business loan eligibility, complete the application form with all required papers, receive the funds in your account, and use them for any business purposes you like.
 

Simple and Fast Disbursement Process

These days, a large number of innovative financial institutions offer credit facilities to individuals and businesses. These companies leverage technology to accept applications and require borrowers to upload copies of documents online without any hassle. Online applications get processed a lot faster and the loans are usually disbursed within 48 hours.

No Sharing of Ownership

Many small businesses opt for alternate financing from venture capitalists or angel investors to set up and expand their businesses. However, to avail of funds, the business owners usually have to share ownership rights in the form of profit sharing. In the case of unsecured business loans, the owner does not have to risk anything—neither his assets nor his stake in the business.

Builds Credit

Most borrowers are unaware of the benefits of a small business loan in improving their credit score. Since unsecured business finance comes with short tenure, it becomes easier for businesses to easily repay it without disrupting their budget. Repaying the loan on schedule helps you build your credit that will ultimately help you secure a low-interest unsecured business finance rate in future.
 
Having said that, secured loans do have certain advantages over unsecured loans. Some of them are:
 

Less-than-perfect Credit Score is Accepted

Secured loans are backed by property, and therefore, lenders are willing to lend to borrowers who do have a satisfactory credit score. On the other hand, in the case of unsecured business loans, most lenders refrain from lending to borrowers who do not have a good credit score.
 

Low Interest Rates

There’s less risk to the lender in the case of secured loans, and therefore, lenders are willing to offer loans at low rates of interest.
 

Long Repayment Period

Secured loans have long repayment tenures, and therefore, you get more time to pay off the debt.
However, the major disadvantage with secured loans that far outweighs its advantages is the risk to the borrower. The borrower stands to lose his property or other valuable assets in case of default. Also, because the repayment tenure is long, the borrower ends up paying more in terms of the interest cost.
Lenders offering unsecured business loans have their own measures in place to protect their interests. These measures include charging higher rates of interest, personal guarantee, or placing a lien on your accounts. Also, the loan tenure for unsecured loans is shorter. The good thing about that is you become debt-free faster and pay much less towards interest costs.

ALSO READ: Secured Loan vs. Unsecured Loan- Which one is better for you?

To Conclude

Many business owners prefer to avail unsecured personal loans to meet their business needs. However, before applying for an unsecured business loan, you must evaluate all the options carefully and weigh the pros and cons to find the right funding option. You should also go through the eligibility criteria for business loans and other terms so that you can negotiate with the lender for the best unsecured business loan at an attractive interest rate.
 
Disclaimer: This post was first published on 21 May 2020 and has been updated for the latest information, freshness, and accuracy.