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Top 5 Problems Businessmen Face In Getting Unsecured Small Business Loans In India
3 Mar 2020
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Building up a business calls for a mix of skills that include strategizing, innovating, financial management, and much more. It often requires you to avail of an apt financing method to fulfil initial and future business commitments, be it financing supply for an order placement or setting up infrastructure. Large and established businesses that have assets backing them often turn to secured loans by setting up a collateral backing. However, many small businesses do not have the financial assets (such as expensive machinery or real estate) to rely on as collateral for securing a business loan. Yet, a healthy cash flow is a requisite for doing business, since finance needs may arise anytime for feeding operational expenses or a growth agenda. In such a situation, an unsecured small business loans may be the solution.

What is an unsecured business loan?

An unsecured business loan is exactly what the name suggests – it requires no collateral, and is therefore unsecure in nature. The amount loaned is generally small, hence is best availed for small short-term needs, and can be repaid within 1-5 years. While a number of private banks and financial institutions as well as online lenders offer unsecured business loans to small businesses like Muthoot Finance, each lending entity has its own criteria. Every businessman who is availing of an unsecured business loan must scrutinise these criteria, including the fine print. The unsecured nature of the loan poses many risks to the lender, and hence you must be wary of any unusual or hidden repayment or defaulting terms and conditions that may be levied.

Here are the challenges that businessmen typically face in securing unsecured business loans in India.

Difficult approval process: Loaning funds without collateral necessarily implies that the lender is entailing higher risk. Even if banks offer unsecured loans, the process tends to be lengthy and sometimes, complex. A stringent application procedure, extensive documentation and investigation, and verification of business and personal credentials are the norm for granting unsecured business loans in India. The application documentation generally consists of (but may not be limited to) ID proof, PAN copy, ITRs of previous three years, bank statements of the past six months, audited balance sheet and P&L statements for the past two years, proof such as Trade License, Establishment Registration or Sales Tax Certificate, cash flow statements, debt obligation statements, and ownership documents such as declaration of ownership, MoA, Resolutions, Power of Attorney etc. Moreover, different lenders may come up with their own unique requirements, making the process a logistical challenge. The chances of getting an unsecured loan thus turn out to be significantly lower than the chances of getting a secured loan. As of today, however, a number of private online lenders have ventured into this space, providing unsecured loans much more quickly and easily. It is a good idea to evaluate these alternative loan sources as well before selecting a financial partner for unsecured business loans.

 

High interest rates: The very fact that the lender is disbursing funds without any collateral puts them at significant risk. The pay-off for this therefore manifests into very high interest rate. In India, unsecured business loan interest rates may vary in the range of 18%-22%. Private lenders may also charge additional fees. Repaying the EMI becomes difficult for small businesses, which may not have the cash leeway for the due incremental amounts. If you take up an unsecured business loan, it is important that you manage your capital and cash flows strictly, in constant consideration of the unsecured business loan interest rates.

Short repayment period: The repayment tenure for unsecured business loans in India generally varies between one to three years. This short tenure, coupled with the sky-high unsecured business loan interest rates, makes it extremely difficult for small businesses to repay the loan in time. A new business with an unsecured loan is always at risk of defaulting and being subject to penalty, which is an unnecessary expense.

Lack of business credibility: Usually, it is easier for businesses with turnovers of about Rs 50 - Rs 75 lakh per year, a minimum three-year history and adequate profitability to become eligible for a loan. Most banks prefer that your business has had a steady growth for the past three years at least. A start-up without consistency in these credentials typically finds it difficult to meet these criteria, making unsecured business loans a complex financing option.

Loan amount is low: Unsecured business loans are limited to small amounts and generally cannot run into crores. Also, most banks and lending institutions link the lending amount to your business performance and metrics. For example, they may lend an amount equivalent to 60% to 80% of your median annual profits. Other lending institutions may evaluate your business projections as well while calculating your loan eligibility. New businesses with high growth plans may find that such small amounts do not meet their financing needs.

The Indian financial domain continues to remain conservative. An unsecured business loan is thus perceived as a potential loss-making investment by banks and other lending institutions.

Fortunately, things are changing thanks to the entry of new age online lenders who leverage fintech tools to determine the eligibility of small entrepreneurs for unsecured, collateral-free loans. These lenders also bring an innovative approach to lending, offering financial solutions/products, such as merchant cash advance and online seller finance that are tailored to the needs of small businesses.

Despite the obvious difficulties, though, an unsecured business loan is a powerful medium to infuse precious funds, especially for established businesses that are seeking to expand. The presence of alternative lenders is easing the process of procuring an unsecured business loan — one that can provide your business a timely financial boost and propel it towards prosperity.

 

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