What is a Collateral-free Business Loan?
Collateral free loans are unsecured business loans provided to the borrower without indemnification. Businesses can borrow a certain amount at a particular interest rate without a guarantee. Loan eligibility and loan amount vary across lending institutions, but a variety of flexible loan schemes with prominent benefits make collateral-free business loan ideal for businesses, new & old.
Be it to maintain healthy working capital, make reasonable investments, or meet specific business requirements urgently, business loans guarantee quick cash and help businesses easily come up with necessary funds.
What are the Top Reasons for Choosing a Business Loan Without Collateral?
- No need for any guarantee or security
- Fast disbursal, quick approval process and minimal documentation
- Loan amounts in the range of Rs. 5 to 50 lakhs, to a maximum of Rs. 200 lakhs
- Credit guarantee extensions offered by certain banks & NBFCs for loan amounts of up to Rs. 200 lakhs to sanctions
- Flexible tenures ( 6 to 36 months)
- Attractive interest rates
Features of Collateral-Free Loan
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Quick processing
Zero collateral accelerates the processing of unsecured business loans.
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Options for Repayment
A good credit score and financial standing can help borrowers avail favorable repayment options.
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Credit Rating
Better a borrower’s credit rating, the higher the loan amount available and the more comfortable the repayment schedule. A good credit rating can also lead to pre-approved loan offers & reduced interest rates.
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Minimum Required Documents
Lenders offer a quick approval process and demand minimal documentation, making things simple & straightforward for business owners.
Benefits of Collateral-Free Loan
1. Reasonable interest rates
One of the most significant benefits of collateral-free loans, attractive interest rates ease the burden on entrepreneurs, enabling them to focus on their goals.
2. Faster approval of loan applications
The lack of collateral and bare minimum documentation requirements leads to faster loan approval.
3. A multitude of loan options
Loads of different schemes with business-friendly terms & conditions and pre-approved loan offers are available regarding collateral-free loans.
4. Flexible repayment timelines
Firms get to enjoy repayment schedules that suit them the best. The better your credit score, financial profile, and business plan, the more generous the lender are concerning repayment.
5. End-use adaptability
Businesses have the freedom to use the loan amount for any end-user purposes.
6. Simple access to finances
Collateral-free loans offer the most convenient debt funding instruments for micro and small enterprises, start-ups, and the like.
Things to do to Increase Your Chances of Loan Approval
1. Evaluate and improve your credit history
Avoid defaulting on debts, improve your firm’s financial health and ensure timely payment of instalments.
2. Prepare a solid business plan
Be clear about your business objectives and what you intend to do with the loan. Review the financials of your business, and have ready audited balance and P&L statements and all other necessary business-related documents.
3. Review your company’s online presence
Online reputation, brand presence, and popularity are factors that lending institutions may consider. A well-designed & responsive website, proper social media presence, and intuitive digital marketing can substantially boost a business’s online presence.
4. Share your ideas for fund use with your lender
Lenders will want to know how you intend to use the loan funding and how it helps your business prosper. Have a proper business plan ready for lenders to go through.
5. Choose a trusted lender and the right product
Almost all domestic government & private banks and several NBFCs offer unsecured business loans to companies. Research extensively before choosing a lender and the most suitable loan product.
Eligibility Criteria for Collateral-Free Loans
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Applicants must have Indian citizenship and be either self-employed professionals or non-professionals.
- For collateral-free business loans for start-ups, the business must not be older than 5 years.
- A credit score of 700+ is necessary.
- The applicant’s age must lie within the 25 to 66 years bracket.
- Certain banks require the business to be functional and turn a profit for at least 2 to 3 years.
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The minimum annual income of businesses should be a minimum of Rs.1 lakh in metro locations and Rs. 75000 in non-metro areas.
Collateral-Free Business Loans Interest Rates and Charges
- Interest Rate= 15 to 27 % (varies across lenders)(as of September 2022)
- Processing Fees= 2 to 3% of the total loan amount
- Convenience Fees= Around Rs. 45000 (variable across lenders)
- Bounce Charges= Differs from one lender to another
- Penal Interest= Also varies across banks, with a minimum average rate of 2%
How to Apply for Collateral-Free Business Loans
1. Have an effective business plan ready.
2. Research extensively and choose the right lender & loan product.
3. Consult and check whether your business meets the necessary loan eligibility criteria.
4. Have all necessary documents and information at hand.
5. Fill in the loan application form carefully and submit it timely along with all processing & convenience fees.
Documents Required to Avail Collateral Free Loan
- Balance sheets & profit and loss statements duly audited by a registered chartered accountant
- Income tax return filings for the last 3 years
- Bank account statements for the last year
- Business registration and continuity documents (trade license, GST registration certificates,
- Ownership proofs (Sole proprietorship declaration, partnership deed, articles of association, copy of the memorandum, etc.) & personal identity proofs (Aadhar card, Voter ID card, PAN card, etc.)
- Address proof (Utility bills, rental agreements, passport, etc.)
Who needs a Collateral Free Loan?
As they do not require any security and have a swift approval process with minimum documentation, collateral free loans are perfect for start-ups & small and medium enterprises. Many businesses avail of a business loan without security to purchase essential assets, meet working capital expenditures, refinance, or handle any urgent or unforeseen business requirements.
Collateral Free Loans in India
The Government of India developed well-construed schemes to aid budding entrepreneurs & start-ups in their pursuit of prosperity. Small scale industries and SMEs can avail an array of Government-backed collateral free credit schemes.
Public Collateral Free Loan Schemes
MUDRA Loan under PMMY
Started under the Pradhan Mantri MUDRA Yojna, the Micro Units Development & Refinancing Agency offers micro-financing solutions to micro & small businesses and start-ups. Three categories of funding, Shishu, Kishor & Tarun, are available with amounts ranging from Rs. 50000 to Rs. 10 lakhs.
Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)
A joint venture between the Government of India and the Small Industries Development Bank of India, the CGTMSE scheme offers collateral free loans to both new & established enterprises. The maximum lending amount without any guarantee is Rs. 1 crore, and all major commercial, central & private, foreign, domestic, and rural banks act as member lending institutions.
Stand-Up India Scheme
With loan amounts between Rs. 10 lakhs to 1 crore and a tenure of 7 years, the Stand-Up India scheme facilitates debt funding to the business women of India and to women entrepreneurs from Scheduled Cast & Tribes.
Market Development Assistance Scheme for MSMEs
This scheme acts as a medium for expanding the exposure & developing the market for micro, small and medium enterprises. In addition, businesses receive funding for participation in trade fairs, exhibitions, foreign tours, etc.
Bank Credit Facilitation Scheme
A credit facility scheme for India MSMEs developed by the National Small Industries Corporation, businesses can enjoy variable repayment tenures per their income.
Coir Udyami Yojana
Conceived by the Coir Board of India, the scheme supports coir unit set ups across India with project funding of up to 10 lakh and till one complete working capital cycle.
Does Yubi Offer An Advantage?
Yubi is a digitised lending platform that connects businesses & financiers across India. Powered by state-of-the-art technologies, we help businesses find their perfect funding instrument and bring them closer to suitable lenders.
An API-powered architecture and the potency of analytics & machine learning allow businesses to discover & integrate seamlessly with more than 750 lenders & all major banks across India, all through a central digital platform.
Accelerate growth and unlock possibilities with Yubi!
FAQs
Credit scores will worsen in case of default, and penal charges may apply. In addition, the lender can take legal action against the defaulter, and it may become difficult to avail of any further loans.
Certain banks allow loan renewal after the business’ has paid a 2 to 3 % processing fee.
Yes, interest rates are flexible and depend upon a business credit score, history of credit payments, business plan & financial profile. The final rate of interest depends on the bank’s discretion.
There may be specific processing fees, convenience charges, bounce charges, pre-payment & foreclosure charges, document processing charges, or even penal interest rates. The type of additional charges varies among lending institutions.
The interest rate depends upon a business’ financial profile, credit score & history, minimum annual income, turnover, and revenues.
Both new and established businesses are eligible for collateral-free business loans.
Banks generally accept establishments, real estate, and even business assets for securitised loans.