All businesses start with an idea—one that is meant to resolve an existing challenge in society. To put that idea into execution, you need funds in the form of secured and unsecured loans. The promoters of a young business may not have the necessary resources to give wings to their ideas. Similarly, a small business might have done well in the past but to increase its profits and also the viability of its business, it needs to grow with time.
So where do you start looking for funds? The first logical step would be to approach banks. They offer secured loans with the lowest rates of interest. However, most public sector and private banks do not entertain young businesses and also those that do not have a sound track record in repayment of both secured and unsecured loans. To get a secured loan you need to have the right collaterals or business assets that could be pledged against such loans. Most small businesses do not have such collaterals and pledging personal assets is never a good idea given the risk involved.
Another source of funds could be venture capitalists. They invest in young businesses that they are confident will do well in the near future. In return, they demand a stake in strategic decision-making in the business and might also put certain conditions that dilute the promoter’s control over the business.
Therefore, a business that does not have sufficient collaterals to fund business needs should look at unsecured business loans in India. Quite a few FinTech companies offer unsecured business loans in India to meet a small organisation’s urgent working capital needs. This includes loans for inventory stock replenishment, meeting payroll expenses and for vendor services. Such lenders provide unsecured business loans in India on very flexible terms and conditions. They use the best of technology to process a loan application and therefore unsecured business loan disbursal time is very less as compared to traditional lenders such as banks. Also, you are not required to pledge any collaterals against the unsecured business loan. However, before you think of taking an unsecured business loan in India, keep in mind the following simple steps:
- Work out your business need: You need to prepare a clear-cut business case for taking an unsecured business loan. Such a loan, even though it does not require any collateral, comes at a higher cost as compared to a secured loan. In essence, secured and unsecured loans should only be taken for a short period of time to meet urgent business needs that would otherwise impede your business growth. For instance, it should help boost your business and enable it to gain a competitive edge. During a business season, when you need to produce more or provide more services, you could take an unsecured business loan for a short duration and hire more manpower and purchase raw materials. Such a strategy helps you to earn well during the peak business season and the revenue earned as a consequence could be used to repay the unsecured business loan after the business season ends. But before you apply for an unsecured business loan, you need to document your business need and calculate exactly how much should be sufficient to meet that need. Also, keep in mind the repayment schedule and conditions attached to such a loan. Find out the loan product that best suits your requirements based on this calculation.
- Calculate your repayment capacity: Unsecured business loans in India need to be repaid over shorter durations and therefore you need to plan a repayment schedule that does not impact the working capital required for your business operations. For instance, you should schedule to repay more during lean business periods and less during peak business season to maximise returns. FinTech lenders understand business needs and business cycles better and are therefore flexible in unsecured business loan repayment conditions. Also, most are happy to reschedule payments should there be a decline in revenue.
- Choosing the right lender: This is perhaps the most important step that you have to take. While you may be tempted to approach banks for secured and unsecured loans, their loan disbursal processes are often cumbersome and leave a lot to be desired. On the other hand, the new-age FinTech companies have devised finance products keeping the SME needs in mind. So, they understand their business requirements better and even though they charge higher interest rates for unsecured business loans, they are much more flexible and accommodating with loan tenures and repayment schedules. Also, since they use the best of technology, the loan application and disbursal process is much faster and convenient.
- Choosing the right business loan: While unsecured business loans in India are right for short-term business needs and best of all do not require any collateral to be pledged, they come in different varieties and you need to pick the right one based on your business need. You should take a term loan for a fixed period of time and with fixed repayment schedules if you are confident of stability in your business operations and of the ability to meet repayment schedules. In case you face a delay in invoice payments or your business is seasonal in nature, then you could look at other options such as invoice financing or merchant cash advances.
- Compile your financial documents carefully: You should keep all essential supporting documents ready before filing an application for an unsecured business loan in India. Some of the basic documents include VAT returns for a specified period of time, income tax returns, KYC documents and bank statements. While traditional lenders such as banks would require you to submit such documents physically and then manually process your loan application, FinTech firms let you upload such support documents online. They use technology extensively to calculate the eligibility of your loan application and respond within a few hours.
- There should be no penalties for early repayment: An unsecured business loan that has been taken to boost productivity during peak season should ideally be repaid once the season ends. In case you have earned enough you might even be tempted to repay the entire amount in one go. Therefore, it might be worth checking if your lender levies penalties for early repayment. Most FinTech lenders do not levy an early repayment penalty on unsecured business loans in India.