MSME lending reached a new height in FY22 with sanctioned MSME loans standing at Rs. 37.29 trillion (Source: Livemint, June 2022, report by CRIF High Mark). With the government introducing lucrative MSME loan schemes for borrowing, and relaxing payment terms, the last few years has witnessed the growth of many emerging businesses.
Unsecured business loans played a crucial role here. With banks and financial institutions disbursing loans based on the borrower’s creditworthiness and business’s financial success, rather than pledging assets as collaterals, more MSMEs were able to borrow funds when most required.
On that note, let’s take a closer look at collateral-free loans and how they help MSMEs grow their business.
What are unsecured business loans in India?
Conventionally, the bank loan approval process is time-consuming, tedious, and complex. It requires businesses to submit several documents, asset proofs, a business plan and purpose of loan, with little certainty on approval.
With changing times, processes also required change. Banks and financial institutions were quick to recognise the needs of the new era and the opportunities that it created.
Unsecured small business loans or zero-collateral loans therefore are the answer to these challenges. These loans can be taken for a short duration offered based on the borrower’s credit history and business’s financial health, without having to pledge any asset as collateral.
These loans naturally are a boon to MSMEs and start-ups, most of whom do not have assets to offer as collateral but have the need for working capital to run daily operations seamlessly.
How unsecured business loans benefit SME growth
Loan processing is a time-consuming process. It requires document verification, loan amount approval, validating credentials, and more. This naturally delays the process and doesn’t fit SME requirements – i.e., the need for quick working capital to meet immediate business and operational needs.
Unsecured business loans online eliminate this challenge. It allows businesses to apply for loans online with minimal documentation. The verification process is quick, secure, and transparent, informing borrowers in minutes of their eligibility and approval status.
This is beneficial for MSMEs as they get clarity on the status of funds. Some of the other benefits of online business loans without collateral include:
Flexibility in use of loan funds
Unsecured loans are hassle-free loans, that is, it is disbursed easily and gives users the flexibility to use it based on business requirements. Unlike traditional business loans that requires business to spend funds as proposed, unsecured loans can be used for multiple need-based business activities.
Some of the common activities that unsecured loans are used include for:
- Business growth and market expansion including expenses in marketing and sales activities
- Infrastructure development including expenses in IT, software and hardware, etc.
- Purchase of raw materials, equipment, and machinery
- Hiring and daily operational expenses
It is important to note that through lenders offer SME loans without security it is based on the financial records and credit history of the borrowers. Also, though a comprehensive business plan is not required, the business’s past profits and future potential, and a general growth plan is taken into account.
Quick approval and disbursal of loans to SMEs
Leveraging the online loan application process, getting business loans within 72 hours is another benefit that small businesses reap.
As stated previously, traditional banking and loan processes take time. With online application processes, loan approvals can come within minutes, with the disbursal getting done in as early as 72 hours.
This is because the documentation required is minimal and can be submitted and verified digitally without cumbersome paperwork. Some of the documents required for unsecured business loan application include:
- Bank financial statements of 6-12 months
- Business ownership proof e.g., telephone, electricity, water, municipality tax bill
- Business proof e.g., Udyam registration, GST certificate, trade licence
- Residence proof e.g., Aadhaar card, utility bill, bank statement
- Proprietor's KYC i.e., Aadhaar and/or PAN card
With digitalisation and digital transformation, many of the banking and funding processes have been digitised making the system transparent, effortless, and quick. There is however the challenge that MSMEs (especially in the rural areas) are not familiar with the online processes, making it challenging for banks and financial institutions to distribute funds efficiently.
Loan disbursal based on borrower’s creditworthiness
Modern businesses in India are characterised by innovation and an entrepreneurial spirit. The government is encouraging entrepreneurship and providing means for skill development in business and technology to support the establishment of more MSMEs and start-ups in India.
These new businesses are driven by ideas, innovation, and technology, and usually lack assets to pledge as collateral to banks.
Realising the trend and potential of new businesses, unsecured loans for SMEs are based on the credit history and financial records of the company than on assets. However, it must be remembered that risks are involved, making it practical for banks to charge a nominally higher rate of interest, and approve disbursal of small loan amounts.
It is common for MSMEs to avail unsecured loans up to 30 lakhs with easy repayment and EMI options from 12 months to 5 years.
Securing loans based on company profit records and not assets, makes it possible for MSMEs to access funds easily. It also enables them to operate efficiently reducing cash crunch challenges.
Collateral-free funding: The way ahead for MSMEs?
This brings us to the crucial question: Should one take a collateral-free loan for business or not?
Consider the following before taking a zero-collateral loan:
- What is the loan amount you require?
- Is there an alternative way to raise funds? e.g., pending payments from customers
- What are the areas the loan amount will be invested in?
- What is the ROI expected?
- Which lenders are you considering? What are the terms? e.g., repayments, loan amount, interest rates etc.
While it is common practice to visit a bank page for loan application, alternatively you can also visit a B2B platform and loans marketplace for availing loans. These platforms provide offers from multiple vendors to help you select the best option for you. The process is simple, quick, and helps you in getting a loan at the earliest.