Synopsis: In today’s blog, we will explain why unsecured business loans are a great credit option for small business owners.

Small businesses have always had to contend with the dearth of accessible, adequate, and affordable credit. Despite the government’s incessant push towards making easy credit available to MSMEs, largely 60% of their credit demand goes unmet.

Small enterprises either fail to meet the stringent (and archaic) criteria set by traditional banks or struggle with producing sufficient tangible assets for availing of asset-backed, secured loans. This explains why only a measly 15% of MSMEs have accessed formal credit.

So, how can small businesses raise easy, timely, and secure capital for funding all their business requirements? Cue: unsecured business loans.

What are unsecured loans?

Unsecured business loans are those loans, which are offered by lenders without any collateral requirements.

In other words, unsecured loans are extended after ascertaining a borrower’s creditworthiness based on their current financial position, repayment capacity, credit history, and tax filings. These loans are sanctioned without any security pledge or personal guarantees.

But this lack of collateral can result in relatively higher interest charges, owing to the lack of asset backing and subsequent higher risk for lenders. And yet, unsecured loans are an excellent choice for small business owners—we explain why, below.

Why should small businesses prefer unsecured loans?

There are several reasons for small-scale enterprises and industries to avail of unsecured loans, which are as follows:

1. No collateral requirement

By their very nature, unsecured loans denote loans without any requirement for a security pledge. This feature comes in handy for those small enterprises that are just starting their business (nascent stages) or those that do not operate on asset-heavy models, such as the ones following a tech-based approach.

2. Flexible tenure

While lenders prefer extending unsecured business loans for a short duration, the terms are generally flexible. Repayment schedules can vary from anywhere between 12 months to 5 years. Additionally, borrowers also have the choice to pre-pay their loans or to make part-payments.

Thus, an unsecured MSME loan is highly suitable for those looking to capitalize on a near-term growth opportunity, such as preparations for the holiday sales season or streamlining cash flows.

3. Improves credit scores

By paying their installments on time, MSMEs can build their credit history and raise their CIBIL scores. This is easier with unsecured business loans as they are generally short-term, and quickly add up to an MSME’s solid thick credit file. As a result, they will be able to avail of business loans at lower interest rates in the future.

4. Ownership retention

When bootstrapping and secured loans are not an option, many startups and new businesses end up raising funds from angel investors and venture capitalists (VCs). However, any capital raising comes at the cost of stake dilution and an equity stake sale. Thus, unsecured business loans are a better alternative for those looking to retain full ownership of their business and its profits.

5. Quick and easy application

Unlike secured loans, which require stringent collateral checks and procedural requirements, unsecured loans are relatively easier to get. Fewer documents are required that are easily verified digitally. As a result, small business owners are extended loans within a short period—something of high consequence for those looking for funding during a financial crisis/emergency.

6. Working capital needs

Since MSMEs typically struggle with maintaining adequate working capital, an unsecured business loan can go a long way in sorting out asset mismatch. Owing to their quick disbursal and short tenures, small business owners can suitably rely on an unsecured loan to fend off any cash flow discrepancies while carrying out their daily operations efficiently.

7. No end use restriction

In contrast to secured loans that are usually tied to a specific business purpose or are limited in their end-usage, unsecured loans come with no such restrictions. From buying new machinery, scaling operations, rationalizing cash flows, and consolidating debt, to meeting emergencies, an unsecured loan can be used for any or all of these purposes.

Thus, an unsecured loan can go a long way in assisting small businesses in their growth and expansion, even without going down the security pledge route. However, it is best to compare lenders and their loan offerings on their end-use, interest rates, annual percentage rates, repayment schedules, and other charges, before making the final selection.

Scale new heights with a business loan from Protium

Or better yet, discount with the need for extensive research, and opt for an unsecured loan from Protium. We offer collateral-free MSME loans for funding all your business needs, including operational expansion, new equipment purchases, new staff hiring, budgeting for marketing, and much more.

We offer unsecured business loans at affordable interest rates, thanks to our proprietary models, which consider your financial position in its entirety, instead of being restricted to CIBIL scores.