Before we dwell into the schematics of unsecured business loans, its types, and pros and cons. Let us dive deep into the importance of unsecured business loans and the role they play. To summarize, unsecured business loans, are debt offered to applicants without the involvement of any form of collateral from the applicant. Lending institutions that offer unsecured business loans are new-age fintech companies that are striving to solve traditional pain points to reduce turnaround time for loan applications and offer great customer service. Most lending institutions of today that offer unsecured business loans have chartered a tech-centric approach to understanding their customers by tracking their spending behavior, chart preferred modes of communication, payment history, credit scores, and other co-relating financial behaviors to offer tailor-made solutions. One such new age solution that is altering the financial landscape of India and the world are unsecured business loans.
Types of unsecured business loans and why you should know about them?
As an entrepreneur, having sound financial knowledge of the financial space is very important and with the changing times, newer and faster implementations are being seen with newer companies addressing the existing pain points of the conventional financial systems. The unsecured business loans space is experiencing one such paradigm shift.
Back in the day, before the National banks became a hit, village heads, would lend money to the villagers in their community for agricultural and personal purposes, and most of the time, the borrower had to offer their land or cattle as collateral and these too came with high compound interest rates. A few borrowers though were offered the loan, with no collateral collected, because of the relation they had with the lender (in this case, the village head).
The first case is a classic example of the secured business loans while the second case is an example of unsecured business loans. As the fundamentals of banking evolved and the spending power of individuals increased, lenders too altered their measuring devices to spot a risk.
In today’s world, unsecured business loans are granted on the basis of the credit score of the company, the credit score of the applicant and the relationship with the lending institution.
Unsecured business loans are a risk the lending institution takes as they do not ask for a collateral from the applicant. The cost for this risk is compensated by a higher rate of interest when compared to secured loans. The rate of Interest for unsecured business loans range from 10.99% to 20% depending on the scores mentioned above. Better the scores, lesser the rate of interest.
The different kinds of unsecured business loans include:
∙ unsecured business loans from government banks
∙ unsecured business loans from private lending institutions
∙ Unsecured business loans on a Peer to Peer model
∙ Unsecured business loans in the form of Merchant cash advance
Lending institutions do not take any collateral, but what happens if you don’t pay?
There are many disadvantages that come along with unsecured business loans and all of them take shape when the applicant is not able to stick to the repayment timelines.
The repayment schedules are rigid.
Upon non-payment, here are the things an applicant/entrepreneur can face:
Effect in credit rating: Every transaction is logged and non-payment loggings often lead to decline in credit ratings and makes it difficult for defaulters to be eligible for further lending from various institutions. It is very difficult to build a strong credit score and very easy to destroy it.
Your credit scores determine what you pay.
The debt increases:
When an applicant fails to repay a certain unsecured loan, there is a good probability that he/she should be looking forward to addition of a sizable amount to their existing debt. This is can be tricky for few organizations going through revenue deficit, as it tends to increase the equated monthly installment amount without increasing the tenure. Thus tightening the already tight reigns.
The involvement of Judiciary:
Upon non-payment, the lender can charge a case against the applicant and produce them before the court of law. However, these rigid measures are generally taken only when the applicant is repeatedly failing to repay the debt even after several legal proceedings. This safeguards the lender from facing huge losses, as unsecured business loans offer debts up to INR 50 fifty lakhs.
Steps to ensure a smooth transition:
Any financial lending/debt come with their own set of pros and cons and it is crucial that applicants go through every term and clause before applying for an unsecured business loans.
Few best practices followed in the world of finance are:
∙ Prepare a road map of how your repayment cycle would look like
∙ Chart at least 3 variations of the repayment plan
∙ Read the fine print in your lending agreement
∙ Choose lending institutions with good reviews and ratings
Unsecured business loans for long have been supporting the Micro, small, and medium scale enterprises with their flexible repayment structures, flexible capital, quick disbursal, and increased repayment tenure and market-friendly interest rates.
Studies state that, till date, only two to three percent of the applicants have defaulted their lending. This success rate can be attributed to the flexible options that lending institutions of today incorporate to ensure that their customers experience a smooth ride with them. Thus, addressing the pain points that existed in the conventional methods in the world of finance.
There are Fin-tech organisations like FlexiLoans that implement bleeding edge technological solutions at their core to offer their users tailor made solutions that use customer data as foundation. With this customer-centric approach, they are able to disburse better and faster capital in the unsecured business loans market.