Understanding Unsecured Business Loans

 

Definition: Unsecured loans are funds borrowed from banks, NBFCs, or other entities without requiring collateral. They typically involve a personal guarantee from the borrower.

Loan Size: These loans are generally smaller, ranging from a few lakhs to Rs. 2 crore, though larger amounts might require additional security based on business size and borrower history.

Interest Rates: Interest rates are higher than secured loans to mitigate risk:

  • Banks: Approximately 14-15%.
  • NBFCs: Slightly higher, around 15-17%.
  • Inter Corporate Deposits (ICDs): Range between 12% and 20%.
  • Rates from personal contacts are variable and negotiated based on mutual comfort.

Processing Fees: Usually around 1% of the loan amount, subject to negotiation based on borrower profile and loan size.

Repayment Terms: Typically demand loans, to be repaid upon lender's request. Loan periods generally span less than a year, with extensions up to 1-3 years based on agreement.

Eligibility Criteria: Determined by creditworthiness (CIBIL score), intended use of funds, financial performance, and references.

Advantages:

  • Quicker processing compared to secured loans.
  • No need for collateral, providing flexibility in fund utilization.

Disadvantages:

  • Higher costs due to elevated interest rates.
  • Short-term availability with repayment on demand.
  • Risk of invoking personal guarantees if repayments are delayed.

Strategic Considerations:

  • Use unsecured loans for immediate funding needs with fast turnaround.
  • Present loans from personal sources as quasi-equity to strengthen financial ratios.
  • Consider these loans subordinate to bank loans for expansion projects.

Conclusion: Unsecured loans are crucial for managing short-term liquidity needs promptly. Businesses should aim to replace them with more economical financing options as soon as feasible. For more details, contact BankKeeping or read our blogs for more insightful tips.

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