External loans from traditional lenders and banking channels, apart from the financing costs have strings attached by way of collateral requirement. These financial institutions stipulate stringent security conditions often over 100% of the loan amount. In the case of a small business, with a limited asset pool, this criterion is very difficult to meet. Further, this in the event of losses in the business and default on the EMI repayment, the SME faces the risk of losing the valuable asset. Loss of critical business assets can put into question the sustainability of the business. An unsecured business loan India from a fintech lender does away with the asset mortgage condition. This is a huge relief to the SME that can obtain funds without worrying about losing business assets.
SME loans without collateral are extended in the short term to medium term which can help meet expenses towards the conduct of business operations namely equipment maintenance, wages, servicing of payables and inventory purchases. The lender reduces the lending risk by extending such loans between 6-36 months without any lien on the assets. Further, there are no restrictive conditions as to the application of such loans. The loans may be allocated for wide-ranging business purposes like working capital needs, business expansion, facility acquisition etc. Often, an SME which is in a fledgling stage has not yet developed considerable resources in terms of business assets. The production may even be carried out on hired machinery, with even the land being on the lease. In such situations, meeting the bank condition of producing multiple assets of value is a tall task to comply with.
The several advantages of unsecured business loans are:
- No guarantee needed:
In unsecured business loans, there is no need for a 3rd party guarantee either. Since no collateral is hypothecated to the lender, there is no scope of property seizure.
- Prompt processing of loan and quick funds disbursement
Since there is no need for valuation of the assets or evaluation of the condition by way of an expert valuer, NBFCs are able to approve loans faster with minimal lag time. The timelines of loan sanction are a very big advantage to SMEs where time is of utmost essence. It may happen that a sudden big contract has emerged and the small business needs urgent funds to cater to the demand. The loans extended by NBFCs are exclusively custom made to suit the requirements of SMEs, whereby quick fund can be accessed by a small business. Fintech companies can process loans at a record speed of 3-5 days if all the relevant documents are uploaded by the applicant. A bank may take up to 10-14 days to grant a business loan, thus in several instances, defeating the very purpose of the loan.
- Online process without tedious paperwork
Since fintech lenders extend unsecured loans without a strict underwriting process, the loan application and approval is conducted online. This saves time for the business, without having to physically visit the office premises of the lender. Further, even the final loan agreement may be signed digitally.
- Loan amount not restricted to the value of the underlying asset
This is a huge plus as far as SME loans without collateral are concerned. Unlike loans extended by banks, where the loan amount is a certain percent of the underlying asset value, there is no such clause in loans from NBFCs. Hence one can obtain the loan amount as per business requirement, with no restrictive condition.
- Saving of valuable business time
Since there is no charge on assets in case of an unsecured business loan, there is no need to frequently evaluate the asset condition or its value in frequent intervals of time by the lender. The business owner can fully focus on business growth without having to give time to schedule visits by the lender agents.
- Motivation to improve inherent financial strength
Unsecured business loans are granted based on the inherent financial and business performance of the business on a standalone basis without any collateral valuation. This indirectly incentivizes the business to improve its financial metrics.
Unsecured business loans have inbuilt business-friendly terms and provisions, such as low processing fees and zero-hidden costs. Hence, such unsecured loans are attractive to small business owners looking for quick and convenient funding.