Since the COVID-19 crisis, collateral free business loan is becoming increasingly popular. These unsecured loans have lower interest rates than before and allow for flexible repayment options. According to a survey, almost 70% Indian businesses have applied this year for collateral-free loans.
Understanding a Collateral Free Business Loan
When a borrower, especially a business organisation, reaches out to any fintech or a money lending institution, they are not bound to mortgage any of their property as security. The lending institution thus lends money without any collateral at a fixed or floating rate of interest. This whole lending and borrowing practice in simple term is known as collateral free business loan.
Why Does a Borrower Seek Collateral-free Loans?
Given the ever-changing needs of businesses, traditional banking models have fallen behind. Many small and medium-sized businesses that apply for loans fail to meet the eligibility criteria.
This has led to a gap between the experience of banks and businesses that need to borrow money from them.
Banks require collateral to vet these businesses. At that point, many businesses can’t afford it. Lending approval can have a significant impact on a business’s fate. A borrower may thus end up feeling anxious and stressed. These borrowers then look for other lenders that can provide them with immediate working capital.
Many SMEs were wiped out by the pandemic, and their attempts to recover have been halted. These businesses can get back on track with collateral-free loans.
How Can Collateral-free Loans Benefit Your Business?
Collateral free business loans can be especially helpful for small businesses who don’t have the required credit score to qualify for traditional lenders.
Few important benefits include:
- No third-party or collateral guarantee is necessary
- Competitive interest rates and attractive charges
- Flexible repayment terms and other options
- The credit decisioning system automatically approves applications and makes it easy to process your application quickly and easily.
Document Requisites for Collateral-free Loans:
- KYC documents
- Signed and dated application form
- Relevant financial documents
- Statement from bank accounts for the past 6 months
- Form 60/PAN Card
- Business proof
Collateral-free Business Loan Interest Rates
Generally, collateral free business loans interest rates are higher than those of secured loans. This is mainly due to the fact that borrower has nothing to pledge, and it is risky for the lenders. Therefore, because of the risky nature of this lending practices, lender charge a higher rate of interest.
Mistakes to avoid before applying for a collateral free business loan.
- The first mistake a borrower makes while proceeding for such loan is they never read terms and conditions properly. This is not at all recommended. Borrower should read all the terms and conditions and documents very carefully.
- Always try to close an existing loan before applying for a new loan.
- Never apply for a loan that can’t be repaid.
- Do not apply for multiple loans at the same time. If any of the application gets rejected, it can impact your credit score negatively.
- If you have any existing loan ongoing, be sure you have not failed any of its EMI.
- Lenders have online calculators that can help you to calculate your EMIs, principles, and tenures in advance. Make sure you use it before applying for a loan.
A collateral free business loan can come in handy when you are in trouble with money. If this loan option is used properly, then you can make a lot of progress in your business. Before applying for the business loan, read the documents thoroughly and apply for the loan carefully.