In 2024, the unsecured business loan (UBL) market in India has seen remarkable growth, with a 67% increase in FY23 followed by an additional 42% in FY24.
This surge reflects the growing reliance of startups on unsecured financing, particularly as they look to expand without the need for collateral.
As more startups turn to unsecured loans—often with interest rates above 25%—entrepreneurs must understand the implications of borrowing in this evolving market.
This article provides a comprehensive account of unsecured business loans for startups to help them make informed decisions before applying for them, ensuring their financing choices align with their growth goals.
What are Unsecured Loans?
Unsecured business loans provide financial assistance to startups and small businesses without collateral, designed for entrepreneurs who lack the tangible assets typically required for traditional loans. These loans offer startups the financial support needed for initial operations, such as purchasing equipment, hiring staff, and covering operational expenses.
How do Unsecured Loans Work?
Unsecured business loans are based on the creditworthiness of the business or the entrepreneur’s credit score. A legal agreement is signed, stating that personal capital may be used to repay the loan if the company fails to meet its obligations.
Lenders assess a business’s repayment ability by reviewing financial documents like bank statements, income tax returns, and GST filings. They also evaluate the business plan, operations, and growth prospects to gauge future stability.
Once approved, the business repays the loan in instalments, including interest. Early repayment is possible, though prepayment charges may apply. Some lenders offer a Flexi-loan option to reduce monthly EMIs.
These loans can be applied for online or in person at lender branches by submitting the required documents.
Types of Unsecured Business Loans
Unsecured business loans come in various forms, each designed to meet different funding needs and repayment structures for businesses. Some of them are listed below:
Term Loans
Term loans offer a lump sum to businesses, repaid over a fixed period with a set interest rate. They are tailored to the business’s needs and repayment ability, with predictable schedules for easier cash flow management.
Short-Term Loans
Short-term loans offer quick capital with repayment terms of a few months to a year. They’re ideal for urgent needs and have faster approvals but typically come with higher interest rates.
Invoice Financing
This form of invoice financing involves a business selling its unpaid invoices to a factoring company at a reduced rate in exchange for an immediate upfront payment based on a portion of the invoice value.
Merchant Cash Advances
A merchant cash advance provides businesses with a lump sum based on a percentage of future credit card sales, determined by monthly transaction volume or card swipes.
Overdraft
An overdraft is a flexible credit option tied to a business’s current account, permitting withdrawals beyond the available balance up to an approved limit. It is beneficial for companies with fluctuating cash flow.
Business Credit Cards
Business credit cards offer unsecured revolving credit for daily expenses, allowing purchases and carrying balances with interest. They don’t require collateral but typically have higher interest rates than secured loans.
Pros and Cons of Unsecured Business Loans
Here’s a quick overview of the advantages and drawbacks of unsecured business loans.
Pros:
- No Collateral Required: The borrower does not need to pledge any assets, reducing the risk of asset loss.
- Quick and Easy Process: The loan application, approval, and disbursement are fast and hassle-free.
- Debt Discharge Possibility: In case of bankruptcy, there’s a possibility the debt could be discharged.
- Flexible Eligibility: Easier access for businesses without valuable assets to offer as collateral.
Cons:
- Higher Interest Rates: Due to the increased risk, lenders charge higher interest rates.
- Smaller Loan Amounts: The loan amount may be smaller than the business requires.
- Risk to Credit Score: Defaulting on the loan can damage the borrower’s credit score.
- Higher Risk for Lenders: Without collateral, lenders face a greater risk of non-repayment.
Distinctions between Secured and Unsecured Loans
If you’re uncertain whether to choose secured or unsecured business loans, the following points can help.
| Differentiation | Unsecured Business Loans | Secured Business Loans |
| Collateral Requirement | No collateral is needed, making it accessible for many businesses. | Requires collateral or security to back the loan. |
| Borrowing Limit | Typically, it has a lower borrowing limit since no security is needed. | Generally, it offers a higher borrowing limit due to the security provided. |
| Lender’s Risk | Higher risk for lenders, as there is no asset to claim if the borrower defaults. | Lower risk for lenders as they have collateral to claim in case of default. |
| Interest Rates | Tends to have higher interest rates due to increased risk. | Usually, it features lower interest rates because of reduced risk. |
| Repayment Tenure | Generally shorter repayment terms, ranging from 1 to 5 years. | Often comes with longer repayment terms, allowing for more flexibility in payments. |
| Application Process | Quicker application process with minimal documentation required. | Involves extensive documentation and formalities. |
How to Apply for Unsecured Business Loan?
Applying for an unsecured loan is easy today, with leading debt financing platforms like Recur Club providing ultra-fast, collateral-free funding with absolute transparency.
Check the steps below to apply for an unsecured business loan:
- Sign Up & Provide Business Info: Create an account and submit basic business details (name, type, revenue).
- Upload Documents: Share required documents such as KYC, financial statements, and ITRs.
- Loan Assessment & Approval: Recur Club evaluates your application and, if eligible, offers loan terms.
- Disbursement: Upon accepting the offer, the funds are transferred to your business account, typically within a few days.
Eligibility Criteria
To apply for an unsecured business loan, the business typically needs to meet the following criteria:
- Credit Score: A good credit score is crucial for approval, usually above 650-700.
- Business Age: Most lenders require the business to be operational for at least 1-2 years.
- Annual Turnover: A minimum annual revenue, often starting from ₹10 lakh or more, is required.
- Profitability: Lenders prefer businesses showing consistent profitability and positive cash flow.
- Business Type: Certain businesses may be ineligible based on industry or business structure.
Conclusion
Securing an unsecured business loan can be an instrumental financial decision for startups, but it’s essential to understand the eligibility criteria, required documentation, and potential borrowing implications.
By evaluating your financial situation and exploring various unsecured loan options, you can find the best fit and secure the funding that suits your business needs. Recur Club simplifies this process by offering tailored financing from a network of 125+ lenders, including Tata Capital, INCRED, and Aditya Birla Capital.
