The idea of taking a loan makes several people uncomfortable. Knowing that you owe someone money or that you are putting your other assets on the line can be a disquieting feeling.
Have you given any thought to taking a loan without putting up collateral? Yes, such loans do exist. They are known as unsecured business loans, one where you do not need to pledge your assets and you get a loan based solely on your word and a good credit history. This is unlike secured business loans where you are expected to put up assets as security against the loan. Besides this main reason, there are many unique features that give unsecured business loans an edge over secured ones.
- Beneficial when SMEs require small loans
If your need is only of a small amount, something to help you tide things over while you wait for some payments to be realised, you can opt for an unsecured loan. Since there isn’t any collateral to be put up, the risk is higher for a lender. Hence, the loan amount in collateral free loans is much smaller than a secured loan. But do keep in mind that the interest could be tad higher.
- Flexible repayment
Repayment terms are generally more relaxed for an unsecured loan. There is often no end date and these type of loans do not typically run on a fixed term. You can strike up a payment schedule with the lender. The money borrowed, as well as the interest that you have accrued, can be paid back anywhere between one to three years of having availed the loan. If you decide to go for a secured loan, learn to negotiate better terms.
- Easier to obtain
Since the loan amount is smaller, and there is no collateral put up, there is less paperwork involved in this type of loan. The application process is easy, and approvals are much faster than most other loans. There is very little documentation required, and most of the application and approval process takes place online.
- Suitable for SMEs
Collateral free loans require very little documentation. Most registered SMEs already have the required documents in place. While applying for an unsecured business loan, an SME will require government approved proof of identification, proof of address, copies of IT returns for the last three years, and bank statements for the last six months. If the business has availed of any other loan or has an on-going debt or obligation, the business will need to furnish documents for the same at the time of applying for the unsecured business loan.
Have we mentioned this earlier? When applying for unsecured business loans, an SME does not need to put up its assets as a guarantee against the money it is borrowing, effectively making these collateral free loans.
While a secured loan might offer you lower rates of interest, those loans are attractive when you are looking at making a sizeable investment in your business. For all smaller requirements, unsecured business loans will always have an edge over secured ones.