WHAT IS AN UNSECURED BUSINESS LOAN — ALL YOU NEED TO KNOW

An unsecured business loan is a short-term funding solution which does not require personal or business assets as security, but is rather based on the financial history and cash-flow of the business, and the credit worthiness of the business and its promoters.
As the risk for the lender is higher than in any asset or collateral-backed loans, the Interest rate for an unsecured business loan is higher than the interest rate on SME Loan which is backed by a primary security (machine, equipment, stock, book debts), and additionally by either collateral security (real estate property) and personal guarantee of promoters & third parties, or guaranteed under a Credit Guarantee Scheme.
In addition to higher interest rates, the loan repayment tenure is also much shorter for an unsecured business loan as compared to an SME Loan because of the higher risk of default over a longer period of time.
IS AN UNSECURED BUSINESS LOAN SAME AS LOAN UNDER MUDRA OR CGTMSE?
A lot of people believe that an unsecured business loan is same as a loan under MUDRA or CGTMSE Schemes. However, that is not the case.
As mentioned earlier, every SME Loan is secured by:
i. Firstly the primary security (Machine or Equipment in case of term loan and current assets in case of a Working Capital Cash Credit Facility).
ii. Additionally, by a collateral security and personal guarantees. In case the business and its promoters cannot provide sufficient collateral securities (for loans up to Rs. 2.00 Crores), the loan may be guaranteed under a Credit Guarantee Scheme, MUDRA or CGTMSE.
In short, an SME Loan is either provided for creation of an asset (Machines or equipment) or for working capital requirement, with 25% to 40% margin to be covered by the business or promoters. The end use of funds is to be duly verified by the Bank, from time to time.
An SME Loan is a revolving line of credit involving a continual borrowing and repayment plan, where the borrowers end up paying interest for a significantly longer period of time.
An unsecured business loan, however, as the name suggests, is a type of loan where businesses do not need to tie up the assets of the business and / or promoters for availing a loan facility. Further, the loans are repaid within 12 to 48 months, depending upon the repayment capacity of the business, thereby significantly limiting the outgo on interest payment.
COMPARISON BETWEEN ALL TYPES OF BUSINESS LOANS (SME LOAN & UNSECURED)
Apply for an unsecured business loan at https://msmemitra.com/businessloan
While each type of loan serves its own purpose, we can see from the case study here that because of shorteR loan repayment period, the actual cost of an unsecured business loan over its currency (tenure) will work out to be lower than the cost of collateral backed SME Loan and SME Loan under Credit Guarantee Scheme.
BENEFITS & DRAWBACKS
BENEFITS:
  1. No risk to existing assets of the business and promoters
  2. May increase the leverage on the balance sheet of the company, leading to a negative perception
  3. Shorter repayment period, meaning lower outgo on interest compared to SME Loan
DRAWBACKS:
  1. Higher Interest Rate than in an SME Loan
  2. Quick processing — 2 to 7 days
  3. Higher EMIs due to shorter repayment period
WHAT IS THE PURPOSE OF TAKING AN UNSECURED BUSINESS LOAN?
An unsecured business loan is taken for business expansion or urgent short-term working capital requirement. It is also considered ideal for meeting expenses which guarantee profitable returns. For example, for a marketing promotion campaign to attract customers which will lead to more revenue and profits for the business.
WHO CAN TAKE AN UNSECURED BUSINESS LOAN?
An unsecured business loan is considered ideal for established and profitable businesses with a strong financial performance in the previous years, and a steady cash-flow. The business should have registered a higher than industry average growth in the top-line (revenue) with a comfortable profit margin. Further, the business and its promoters need to have a clean and strong credit history.
Typically, an unsecured business loan is guaranteed / co-obligated by one or more of the promoters of the business, thereby giving the bank the right to take legal recovery actions against the business and promoters, in case of default.
HOW TO APPLY FOR AN UNSECURED BUSINESS LOAN?
At MSMEmitra, we offer unsecured business loan pan-India through our network of segment leading Banks and NBFCs, at lowest possible interest rates and processing fees. The loans are processed quickly and disbursed within 7 days. Visit https://msmemitra.com/businessloan to apply!!
DYK — YOU CAN EARN CASHBACK ON PROCESSING OF YOURUNSECURED BUSINESS LOAN
For every unsecured business loan processed through MSMEmitra, we offer 0.30% of the loan amount as Cashback after payment of the first EMI.
Visit MSMEmitra to apply for an unsecured business loan. If you’re a Start-up or an MSME, identify and avail the benefits of all the applicable business and need specific SME Schemes.
We also help businesses in Preparation of Project Report for Bank Loan and in arranging SME Loan facilities through our network of Private Sector, Public Sector, and Co-operative Banks. Visit MSMEmitra for more.

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