Businesses can avail unsecured business loans to finance their working capital, equipment, and other business expenses. The working capital requirements include bills, payroll, marketing budget, renovation, and more. Other expenses could be buying or leasing of premises and equipment, digitalization, and others. Before taking the plunge, let’s look at the pros and cons of the unsecured business loan (UBA).
Pros of Collateral Free Business Loan
No collateral required
You can get an unsecured business loan without having to pledge any asset as a guarantee. There is no need for a guarantor either. Since no collateral is hypothecated to the lender, there is no scope of property seizure.
Faster approval
The time that is spent on authentication, and the evaluation of collateral assets is saved, since no collateral is required. This speeds up the loan approval process. Some NBFCs approve your business loan in 24 hours.
Build credit history
Unsecured business loan is an ideal way to build your credit history, if you do not have one. Lenders gauge your credit history before lending loans. Your business might require funds for expansion, and successful operation. Lenders are wary of giving loans to business owners who have no credit history. You can avail an unsecured business loan to build a credit history. Timely repayment will earn you a good credit score.
Flexi borrowing and repayment
Some unsecured business loans have Flexi loan facility. They allow you to borrow when you need, and repay when you can. You can borrow amount as much is required without utilizing the whole loan facility. The interest is applicable only on the borrowed sum. You can make part repayments without any penalty.
Cons of Unsecured Business Loan
Interest rates
Collateral-free business loans can be risky for the lenders. Therefore, they may have higher interest rates to offset the risk. However, you can get business loan with nominal business loan interest rate from some NBFCs.
Credit score
Since lenders get no collateral, for the unsecured business loan, they assess your credit score. You need to have a high credit score to avail business loans without guarantee.
Additional Read: What is a CIBIL score and what effect does it have on your business
Documentation
There is no paper work required for asset evaluation of collateral-free business loans. However, certain documents are required to avail these loans. Incapability to furnish these documents can prevent loan approval. Some of the documents required are:
- KYC documents
- Bank accountant statement
- Relevant financial documents
- Understanding of the pros and the cons of collateral-free business loans is vital before you apply for the business loan
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