Embarking on a new venture in India is an exciting yet difficult journey. However, one of the big challenges that startups experience is funding themselves. This article will focus more on unsecured business loans, which are among the popular means of financing, mainly because some individuals do not have security they can give as collateral for them.
But are they the right choice for your startup? Let’s explore this more to help you make a sound decision.
Definition of Unsecured Business Loans
For unsecured business loans, you do not need any assets to protect yourself from borrowing money using unsecured business loans. This translates to you not having to put your house or assets up as security if funding is needed.
Instead, lenders look at the applicant’s creditworthiness, drawing from their credit history, business plan, and financial statements. Due to the lack of collateral, these credits often bear higher interest rates charged by the lender to cover the greater risks involved.
Merits of Unsecured Business Loans
1. No Need for Collateral – This is the good thing about them, especially when you are running a startup or running low on funds.
2. Faster Approval – Unlike secured loans (loans with collateral), these can be approved within no time.
3. Flexibility – The amount borrowed from unsecured business loans can be utilized to carry out different activities in the company, such as buying stock or marketing campaigns.
Disadvantages of Unsecured Business Loans
1. They Are More Expensive – They usually have increased interest rates as compared to secured ones.
2. Greater Monthly Charges – These usually come with the shortest payback periods.
3. Eligibility Criteria is Strict – This is because, as a person starting up a business, you may have difficulty providing proof of a long-run credit history and continuous income flow.
Interest Rates within India
In India, the rates at which banks charge people who receive unsecured business loans differ based upon their customers’ creditworthiness and financial muscle. Below are some of the current interest rates –
● Godrej Capital – 8.55% onwards per annum
● State Bank of India – 11.20% to 16.30% per annum
● HDFC Bank – 10.00% to 22.50% per annum
● Axis Bank – 14.25% to 18.50% per annum
● ICICI Bank – 17.00% onwards
However, all these rates keep fluctuating according to an individual’s credibility, amount borrowed and repayment period, among other things.
Initiatives by the Government for Women Entrepreneurs
The government of India has launched several programs to support women in business, given their indispensable role in economic growth. These initiatives aim to empower women in business through financial assistance, training opportunities, and mentorship programs.
#1. Stree Shakti Package
The scheme is aimed at women who run businesses. Women must own a minimum of 51% shareholding in order to qualify for this package. This small business loan for women includes –
● Interest Rate Discount – For sums beyond ₹2 lakh, interest is reduced by .05%.
● No Collateral Needed – This applies to small-scale industry requirements below ₹10 lakh.
#2. Pradhan Mantri Mudra Yojana (PMMY)
This scheme was established for enhancing access to finance among micro as well as small-scale businesses by offering 3 loan products –
● Shishu – Loans up to ₹50,000
● Kishor – Loans between ₹50,001 and ₹5 lakh
● Tarun – Loans between ₹5,00,001 and ₹10 lakh
Regardless of whether they are startups or established entities, these credits are accessible to both.
#3. Stand-Up India Scheme
This scheme wants the chief people and women entrepreneurs. It provides greenfield enterprise finance through loans ranging from INR 10 lakh to INR 1 crore. Besides, it offers –
● End-to-end-support includes pre-loan training, formalities for facilitating sanction, factoring, and marketing support.
● Repayment tenure of up to 7 years with a maximum moratorium period of 18 months
Do Unsecured Business Loans Fit Your Startup?
For one to decide if indeed he/she should go for an unsecured loan, he should take into account the following things –
1. Business Development Phase – New businesses without a solid asset base can find accessible unsecured loans.
2. Risk Bearing Capacity – The absence of collaterals secures personal ownership, thereby cutting down personal finance risk.
3. Evaluation of Expenses – Higher rates can impair liquidity. Hence, it is important to compare costs against earnings expected on investment.
4. Qualification – Always ensure that you satisfy all requirements set by money lenders including those based on your income flow and credit score rating.
Ways To Get Unsecured Business Loans
1. Maintain a Good Credit Score – The chance of good credit history also results in easy lending terms.
2. Come Up With A Solid Business Plan – A well prepared and structured business plan acts as an assurance to the lenders that you have a well-established strategy for repayment.
3. Check Out Government Programs – There are government initiatives as well as small business loans for women that women in business can leverage.
4. Compare Lenders – Check varied terms from different banking institutions before settling on one that suits your needs best.
The Bottom Line
Start-up companies seeking finance without having to give up any collateral may consider unsecured business loans. In any case, applicants need to critically evaluate them against high interest rates and shorter repayment periods, among other factors.
The Indian government has enlisted several programs that support women in business. Moreover, several small business loans for women also exist. Good luck applying!
