Collateral-free loan refers to any loan that does not require any asset, security deposit or the backing of a guarantor. Theseare also called unsecured loans. Collateral free business loans are unsecured and consider your current income, cash flow and business viability to ensure that you can repay your loan on time.
First, let’s understand, what is collateral? Collateral is an asset that has a certain financial value against which you can borrow money. The assets that can be mortgaged for availing of a loan are immovable property, land, machinery, shares and stock, and vehicles. If you cannot repay the loan, the lender reserves the right to take permanent custody of the mortgaged asset and sell it to recover the loan amount that has not been paid.
A collateral-free loan does not require you to mortgage any asset and it gives you complete flexibility to avail of any loan. You can avail of collateral-free loans for personal and business purposes. Higher education, medical emergencies, as well as wedding expenses can be funded through collateral-free loans. Many business loans are collateral-free. The very popular collateral-free loans are cash loans and term loans.
As per CGTMSE (credit guarantee fund trust for micro and small enterprises), Micro and Small Enterprises (MSEs) are eligible for collateral-free loans up to Rs 1 crore. This scheme has been proposed to encourage micro and small enterprises in India. The sector has been grappling with issues like lack of funds, growth opportunities and working capital requirements. The Government of India in association with SIDBI has launched this loan to ensure the viability of SME projects.
What are the features of Collateral Free Loan?
- Loans are available for an amount up to Rs.2 crore (Rs.1 crore for retail business) as per terms of the MSMED Act 2006.
- There can also be a loan for a higher amount. However, any amount exceeding Rs 1 crore would require the backing of collateral. This collateral can be in the form of plant and machinery, land or any other business asset owned by the owner.
- Both, new and existing MSEs can get loans
Benefits of Collateral Free Business Loans
Now that you have a better understanding of what a collateral-free business loan is,here are some of the benefits of collateral-free business loans:
- No protection required
:As the name suggests, collateral-free business loans are free from any requirement of collateral from the borrower. They do not compel the business owner to risk his valuable assets for the benefit of the business. Hence, by removing this obligation, these collateral-free business loans allow entrepreneurs to remain confident and use the loan amount for business purposes without the fear of losing their assets.
- Improves and builds credit history:
Since collateral-free business loans remove the need for mortgage security, another important aspect considered for the borrower is credit history. Since these loans are unsecured, most lenders approve collateral-free business loans only based on the clean credit history of the borrower and a good credit score. Therefore, the opportunity to get a collateral-free business loan is an excellent incentive to pay close attention to and make the most of your credit history.
If you are a first-time borrower, collateral-free business loans can also be a great place to start working on your own and your business's credit score. You can avail of this loan without pledging any security, and by paying EMIs on time, you can build up your credit score over time and become a suitable borrower for larger loans in future.
- Makes loan approval quick:
When the lending process involves security pledged by the borrower, it takes longer to process than a collateral-free loan. This is because a fair amount of time is spent in evaluating the value of the property or possession deposited as collateral and thereby determining the loan amount.
By eliminating this requirement, the lending process is simplified and hence, your business loan amount can be approved and disbursed much faster. With reputed lenders like Poonawalla Fincorp, your collateral-free business loan can be sanctioned in a few minutes and will be reflected in your bank account in just 24 hours.
The documentation required for a collateral-free loan
Business loans that require collateral often require the borrower to submit necessary documents regarding the asset being pledged as security. This can make the entire application process time consuming and lead to additional paperwork. Collateral free business loans, on the other hand, are designed to be as hassle-free and convenient as possible, which includes removing the obligations of excessive documentation. In the case of collateral-free business loans available on the Poonawalla Fincorp website, only minimal documentation is required, and the process can be completed completely online.
Offers flexible payments:
With traditional business loans, you are not only required to pledge security but are also often restricted by limited payment options. Most financial institutions and lenders that offer collateral-free business loans today offer entrepreneurs a variety of options to make repayment as smooth as possible. For example, collateral-free business loans from Poonawalla Fincorp offer good loan tenures at nominal business loan interest rates.
What are the eligibility criteria to get a collateral-free loan?
The eligibility criteria to avail of these loans are very simple:
-Private limited companies having SME/SSI registration are eligible to apply
- Private Limited Companies,Sole Proprietorship Firms (SPF), Partnership Firms, Public Limited Companies
How to apply
You need to start your business operation, get all the licenses, and register your business. You also need to open a current account with the bank and get a business PAN card.
You need to prepare a detailed project report that indicates the viability of the project along with quantitative metrics like ROI, payback and break-even. You should include professional assistance in preparing a feasibility report to convince lenders of the business's prospects.
You need to personally approach the lender and apply for the business loan. It is advisable to approach 2-3 lenders so that a wide range of options are available for loan approvals.
Collateral requirement for business loans has long been a deterrent for business owners who are looking for loans and collateral-free business loans have become a popular solution to this dilemma. By eliminating this requirement, collateral-free business loans provide entrepreneurs with the capital they want without risking their assets in the process. They also provide an opportunity to build a credit history and expedite the loan process with quick approval and minimal documentation.
A notable example of a lender to offer such business loans is Poonawalla Fincorp, a digital financial marketplace. The collateral-free business loans are available on the website with useful features such as flexible tenors and super-fast online loan processing.