Here’s some food for thought – at present, the Micro, Small, and Medium Enterprises (MSME) sector contributes to almost 30% of India’s GDP. With around 63 million small businesses adding to the country’s GDP, this sector still faces certain challenges, among which a crucial one is access to sufficient and timely capital. It is important to note that unsecured business loans have received significant attention from borrowers in the MSME sector, for obvious reasons. To begin with, the need for zero collateral already makes the process of availing a loan more convenient compared to secured loans.
With more and more lenders recognising the potential of MSME businesses, funding options are also increasing. It is a good time to take a close look at how unsecured loans are rapidly gaining popularity for modern-day MSMEs.
What Are Unsecured Business Loans?
It is basically a type of loan that a lender offers to the borrower without asking for any collateral. Instead, the credit history of the borrower, the revenue, cash flow, and overall financial health of the business become the deciding factors for the lender.
Types of Unsecured Business Loans for MSMEs
The evolution of unsecured financing has introduced a range of loan products suited to various business requirements:
Term Loans
These are fixed-term loans with periodic repayments and are most appropriate for long-term investments. The interest rates are determined upfront in accordance with the applicant’s credit profile and market rate.
Merchant Cash Advance (MCA)
MCAs provide advanced funds to enterprises in return for a share of their daily card-based transactions. This is best suited to retail and services MSMEs with regular transactional volume.
Working Capital Loans
They are short-term loans that are used to finance day-to-day expenses such as wages, leases, and restocking of inventories. They are meant to cover short-term cash flow shortfalls.
Business Credit Cards
These credit cards provide revolving credit. Businesses have the capital ready to access whenever funds are required.
Why Are Unsecured Business Loans Gaining Popularity?
Here are the key reasons why MSMEs are turning to unsecured business funding:
No Collateral Needed
Not all MSMEs, especially the new ones, have physical assets to mortgage, making unsecured loans their only option. They are able to receive funds when needed without any property or machinery to show.
Quicker Approvals and Disbursals
Since time is saved on collateral evaluation, the overall processing of unsecured business loans can be completed quickly, allowing faster approval and disbursal.
Reduced Documentation
Less documentation is a major benefit in itself. Along with the loan application, the lenders ask for basic documents like identity proof, income tax returns, GST returns, and bank statements.
Personalised Repayment Terms
Flexible repayment options enable borrowers to align EMIs with the revenue cycle. This alleviates pressure on working capital and offers improved financial planning for businesses.
Improves Financial Well-being
Regular and prompt repayments create a good credit history, making the borrower eligible for greater amounts or better terms for loans in the future.
Who Can Benefit from Unsecured Business Funding?
Unsecured business financing is ideal for various kinds of businesses, such as:
- New Businesses with Regular Revenue: Startups earning steady income but not owning adequate assets can finance growth, advertising, or recruitment.
- Seasonal Businesses: Companies like tourist services or farm suppliers can cover cash flow during off-season months.
- Freelancers and Service-Based MSMEs: Content creators, consultants, internet marketers, and IT service providers typically have limited capital requirements but can have high potential and can be considered reliable applicants.
- MSMEs in Growth Mode: Enterprises that want to establish new branches, replace machinery, or add staff can utilise unsecured loans for immediate capital injection.
Unsecured Loans in Action: Enabling Growth
Consider a small garment factory in Jaipur that gets an order for bulk export. The company has to procure raw materials and temporary workers, but doesn’t have liquid funds. A business loan without collateral enables the entrepreneur to arrange short-term working capital in a matter of days. With the order being completed within time, the company earns not just a profit but also a reputation for punctuality, which opens up doors to future possibilities.
In another situation, a Bengaluru digital marketing agency must invest in updated software and content creators to meet increasing demand. Having no physical assets to pledge, the agency seeks an unsecured term loan. Within seven days, the money is credited, enabling the agency to increase operations, production, and profitability.
Challenges to Keep in Mind
Although unsecured business loans have a number of advantages, there are a couple of things to note:
- Increased Interest Rate: The lack of collateral means a marginally increased interest rate relative to secured loans.
- Rigid Eligibility: Lenders can ask for a high credit score and business revenue.
- Shorter Duration: Unsecured loans may be better for short to medium durations and not long-term ventures.
Final Thoughts
Unsecured business loans are becoming a convenient and reliable financing option for MSMEs in the country. These loans, with their simple process, quick access to funds, and end-use flexibility, are allowing businesses to create and meet goals that would otherwise be at a standstill due to a lack of capital.
