Starting a business is a business of your own, and to make it grow, you need funds. However, traditional loans often need security and have been easy for those who do not have substantial assets to pledge. This is where unsecured business loans for micro, small, and medium enterprises (MSMEs) come into play. These loans offer flexibility and accessibility without collateral, making them attractive options. In this blog post, We’re going to explore the seven unsecured business loans in India and choose which one is suitable for you.
Types of Unsecured Business Loans in India
1. Term Loans
Term loans are a popular financing option for businesses in India seeking funds for specific needs. Unlike working capital loans used for day-to-day operations, term loans provide a lump sum that’s repaid in installments over a fixed term, typically ranging from 1 year to 8 years.
These loans offer several advantages:
- Financing Growth: Fund purchases of equipment, expansion projects, or renovations.
- Flexible Repayment: Choose monthly, quarterly, or even bullet repayments to suit your cash flow.
- Collateralized or Unsecured: Depending on the lender and loan amount, collateral may not be required.
Term loans are available from various lenders, including banks, non-banking financial companies (NBFCs), and government schemes.
2. Working Capital Loans
Working capital loans are a lifeline for businesses in India, bridging the gap between short-term expenses and incoming revenue. Unlike term loans used for fixed assets, working capital loans provide a quick cash injection to cover everyday operational needs like:
- Inventory Purchase: Ensure a steady flow of materials for production or sales.
- Payroll Management: Meet employee salary obligations without disruption.
- Operational Expenses: Cover rent, utilities, and other ongoing business costs.
Also read, Understanding Secured Loans
These loans offer several benefits:
- Quick Disbursal: Get the funds you need fast to maintain smooth operations.
- Flexible Repayment: Repayment terms are often shorter, aligning with your business cycle.
- Collateral-Free Options: Many lenders offer unsecured working capital loans, ideal for startups or businesses with limited assets.
Working capital loans are widely available from banks, NBFCs, and fintech platforms.
3. Overdraft Facility
An overdraft facility is a credit arrangement banks offer businesses, permitting them to withdraw money above their account balance. The primary advantage is that the business pays interest only on the overdrawn amount for the borrowed time, providing an efficient tool to manage cash flow challenges.
The overdraft limit depends on the securities provided, like fixed deposits, shares, bonds, etc. As a result, the overdraft is a flexible financing tool that helps businesses manage their finances more efficiently.
4. Invoice Discounting
Businesses often face customer payment delays that lead to cash flow problems. Invoice discounting, a credit facility that allows businesses to raise funds against their unpaid sales invoices, can act as a lifesaver in such situations.
With invoice discounting, businesses can maintain steady cash flow, regardless of their customers’ extended payment cycles, and ensure operational continuity.
5. Equipment Loans
Equipment loans are a boon for businesses requiring expensive machinery or equipment. These loans are designed explicitly to finance the equipment needs of a business.
The newly purchased equipment often serves as collateral for the loan. Lenders generally offer equipment loans at competitive interest rates, which can be an accessible solution for businesses looking to expand or upgrade their equipment.
6. Mudra Loans
The Pradhan Mantri Mudra Yojana (PMMY), or the Mudra Loan, is a government initiative to provide unsecured loans to small businesses. Business people can use these loans for activities like business expansion or purchasing inventory.
The Mudra loan is conveniently categorized into three parts based on the loan amount – Shishu (up to INR 50,000 for startups), Kishore (INR 50,000 to INR 5 lakhs for established units), and Tarun (INR 5 lakhs to INR 10 lakhs for expansion).
7. MSME Loans
Micro, Small, and Medium Enterprises (MSMEs) are the backbone of the Indian economy. Understanding their importance, the government and banking institutions in India offer loans tailored explicitly to MSMEs.
These loans can be used to upgrade plant and machinery, expand the business, manage working capital needs, or diversify the business.
8. Business Loans for Women
Recognizing the importance of women entrepreneurs in contributing to India’s growth, several banks and financial institutions offer business loans specially designed for women. These loans often come with lower interest rates and provide the needed financial support to women to encourage entrepreneurship.
How to Choose the Right Business Loan
While the range of available business loans in India may seem overwhelming, choosing the right one doesn’t have to be. Here’s how any business owner can go about making their decision:
- Identify the Purpose of Loan: Every loan is designed for a specific purpose. Knowing why the business needs a loan and how the funds will be used can help businesses narrow down suitable options.
- Check for Eligibility Criteria: All lenders have different eligibility criteria that applicants should fulfil. Criteria usually include factors like the age of the business, annual turnover, profitability, and credit score.
- Calculate the Total Cost of Loan: The cost of a loan isn’t limited to the principal amount. Businesses should also consider added costs like interest rates, processing fees, tenure, and hidden charges, thereby obtaining a holistic picture of the loan.
- Understand the Loan Terms: Business owners must read the fine print. It includes repayment terms, prepayment charges, late payment penalties, and the flexibility offered in loan terms.
Conclusion
The versatility of business loans in India mirrors the diversity within the nation’s vibrant business ecosystem. By understanding the different types of loans and their applications, businesses can strategically leverage these resources to fuel their growth and success.
Frequently Asked Questions (FAQs)
Term loans are traditional lump-sum loans that are repaid over a specific period, typically through monthly repayments. They have fixed or floating interest rates, and businesses can use them for various purposes, such as expansion, capital expenditure, or financing large projects.
Working capital loans are short-term loans designed to finance a business’s daily operational expenses, such as rent, payroll, and inventory purchases. Lenders grant these loans based on the business’s working capital needs, credit history, and repayment ability.
An overdraft facility is a flexible form of financing offered against securities like fixed deposits, shares, or bonds. It allows businesses to withdraw funds beyond their account balance, up to an approved limit. Interest is charged only on the amount utilized, making it an efficient tool for managing cash flow.
Invoice discounting is a credit facility that allows businesses to raise funds against their unpaid sales invoices before customers have paid. This helps maintain a steady cash flow even when there are long payment cycles.
Mudra loans are unsecured loans offered under the Pradhan Mantri Mudra Yojana (PMMY) initiative for various business-related activities of small enterprises. They are available in three categories – Shishu, Kishore, and Tarun – which cater to different stages of business growth without requiring collateral.
Several banks and financial institutions in India offer business loans specifically tailored for women entrepreneurs. These loans often feature lower interest rates, more flexible repayment terms, and specialized support, empowering women to develop and expand their businesses.
Some critical factors to consider include the loan’s purpose, eligibility criteria set by the lender, the total cost of the loan (including interest rates, tenure, processing fees, and other charges), and the terms and conditions, including repayment terms and penalties.
While specific requirements may vary, some standard documents include proof of business registration, business PAN card, address proof, ITR (Income Tax Returns) of the business, audited financials, bank statements, and KYC documents.
