Pros and Cons Of Getting An Unsecured Business Loan in India

New businesses have no collateral to use, and unsecured business loans are a lifeline. They are helpful when you need extra capital for expansion or working capital. 

Even though an unsecured business loan seems too good to be true, you should consider some key factors before taking it out. You can use these loans for this kind of thing for reasons such as expanding businesses, purchasing equipment, managing inventory, and managing cash flows. Discover the benefits and drawbacks of an unsecured business loan below.

Unsecured business loans have many advantages

You don’t need any collateral.

It is unnecessary to put up personal or business collateral for this loan. Lenders instead consider your business income when approving your loan amount and determining your business loan eligibility. High incomes mean higher loan amounts.

The process for applying for this loan is much faster.

Since the documentation process is minimal and quick, it is easy to apply for a business loan online. Since there is no collateral, the disbursement process is faster since there is no time wasted on asset evaluation. Some lenders offer pre approved loans, so you can get the loan amount shortly after the loan is approved, if not sooner.

Your business assets are not at any risk.

You do not have to put up any collateral with unsecured loans so your business assets, such as commercial property, vehicles, inventory, etc., remain risk-free. Lenders cannot seize your business if you fail to pay your EMIs. 

This loan option is perfect for first-time applicants.

It is the best way to build a credit history if you are a first-time applicant. But remember to make your EMI payments on time, not default. Consequently, if you need to borrow funds in the future for a business venture, you will have a credit history to demonstrate your ability to repay the loan.

The loan approval process is faster. 

A lender determines the loan amount of a secured loan by evaluating the collateral value. With a secured loan, you do not have to pledge collateral. This results in more rapid loan processing. Moreover, NBFCs are also disbursing business loans in less than three days.

You improve your credit history. 

Getting unsecured loans is the best option to rebuild/improve your credit score. Your business may require more substantial funds during the expansion phase. No lenders will grant loans to borrowers without credit histories because they check your credit history before lending. You need only pay the EMIs on time after acquiring a loan.

Repayment options are much more flexible. 

NBFCs usually offer unsecured loans since they are willing to risk lending. Flexible repayment options are offered by NBFCs as well. You can customize these according to your business requirements. As a result, you won’t receive any penalties that may result from late EMI payments.

There are cons to unsecured business loans

There is a much higher interest rate.

A business loan with an unsecured interest rate is usually higher than one with a secured interest rate. There are certain risks connected with unsecured loans since they are free of collateral. Lenders do charge more interest for unsecured funding to balance the risk.

The tenures are shorter.

Business loans that are unsecured term are typically for up to five years, which is a short time compared to secured loans, which usually last more than ten years. When it comes to unsecured loans, lenders typically opt for short tenures to minimize risk.

Borrowers risk reducing their credit scores.

If you fail to make your EMI payments on time, you lower your credit score. In addition, if you have a bad credit score, to begin with, you may not be able to avail of unsecured financing since your bad credit isn’t offset by collateral.