Pros and Cons of Unsecured Small Business Loans

By: Alex James

Small and medium-sized businesses can obtain an unsecured business loan to finance their equipment, marketing campaign, working capital, and other business-related expenses. Since these loans do not require any collateral, NBFCs approve them solely based on the borrower’s creditworthiness determined by their income, turnover, vintage, and financial documents. 

Whether taking a loan for business expansion, cash flow management, working capital management, or any other purpose, look at collateral-free business loans pros and cons before taking the plunge.

Pros of Unsecured Business Loans

Here are a few benefits that make unsecured business loans a preferred funding option among MSME owners:

  • No Collateral Requirement: An MSME business loan is collateral-free and does not require personal or business security. Instead, lending institutions approve these loans based on the borrower’s income, turnover, profit, credit history, and past business performance. That is why most NBFCs have eligibility conditions surrounding these parameters to shortlist applicants and approve their loans.

  • Faster Loan Processing: The absence of collateral significantly reduces the documentation requirement, making loan processing much quicker. The lending institution saves a lot of time required for asset evaluation, documentation scanning, etc., making the disbursement process faster.

  • No Risk to Personal and Business Assets: The business owner’s personal and commercial property remains safe since they do not provide them as collateral against the loan. Even if the borrower fails to pay the EMIs on time, the lending institution has no right to seize the defaulter’s property.

  • Helps Build Credit History: Applicants with a poor credit history can use an unsecured business loan to build and improve it. However, make a robust repayment plan and pay each EMI on time to avoid loan default. This way, an improved credit score will support the borrower’s future loan applications by attracting easier approvals and lower interest rates.

Cons of Unsecured business loans

Despite its many benefits, unsecured business loans have some cons as well, including the following:

  • Higher Interest Rates: The interest rate for an unsecured MSME business loan usually is more than that of the secured one. Since unsecured loans have a higher risk for the lending institution, they charge a competitive interest rate to balance the risk.

  • Loan Terms are Shorter: For unsecured business loans, the maximum loan term is around 36 months, depending on the business type and eligibility. It is much shorter than secured loans that may extend up to 15 years. Most NBFCs stick to shorter loan terms for unsecured loans to minimise risk.

  • Harder Eligibility: Since unsecured business loans don’t offer any security to lending institutions, they pay due attention to the applicant’s business type, vintage, turnover, financial performance, and other factors before approving them. Applicants with poor credit scores or economic challenges may find collateral-free business loans difficult to obtain.  

Final words

Are you looking for an unsecured MSME loan? Get quick and hassle-free business loans from reputable lending institutions like Clix Capital – well-known for offering attractive loan terms with competitive interest rates. The documentation process is minimal, and the approval time is quick. Remember to consider these pros and cons before applying for an unsecured business loan.

About the Author

Amaira Sharma is finance expert and former business growth strategist who has more than 8+ years experience in the industry, now she helps others to get better financial stability and standards. She loves to write useful tips on personal finance and businesses.

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