There are two types of loan that financial institutions provide – secured and unsecured. Secured loans are long-term, and you have to hypothecate or mortgage an asset to avail it. Unsecured loans are shorter in term and you don’t have to pledge any asset to apply for one.
A collateral free loan is the ideal financing option to avail for your small businesses. These loans have a shorter processing time as lenders don’t have to verify the asset documents required in secured loans.
Collateral-free business loans are available within 24 hours with tenors ranging from 12 to 60 months. You can avail up to Rs. 30 Lakh for any purposes be it buying new plant & machinery, increasing working capital, purchasing new equipment, expanding to another location, leasing a bigger space, etc.
6 easy ways to avail collateral-free business loans –
- Pay off your existing dues
Clearing your existing debts is one of the ways to improve your odds of getting a collateral free loan. Make sure that the total monthly obligations are not more than 50% of your income if you already have debts.
Lenders calculate your debt-to-income ratio or Fixed Obligations to Income Ratio (FOIR) to check the above. They give more preference to customers with a ratio lower than 50%.
It is better you foreclose any existing loan and clear all credit card dues before you apply for a new loan.
2. Have a credit score of 750 or more
According to CIBIL, around 80% of customers that receive a loan hold a credit score of 750 or more. A high credit score is mandatory in case of an unsecured loan. It is the only form of security for a lender and ensures that you will be able to repay the loan without defaulting.
Check your credit score before you avail a business loan. CIBIL lets you do so for free once every year.
3. Arrange all the necessary documents
You have to provide a minimum number of documents like:
- KYC documents – PAN, Aadhaar, Driving License, Passport, Voter ID, etc.
- Proof of business existence – Any certificate confirming the constitution of your firm like GST registration, Memorandum of Association, Articles of Association, Partnership, RoC registration, etc.
- Bank account statement of the previous month.
- Financial documents – Balance Sheet, Profit & Loss Statement, etc.
- Income tax returns of the previous year.
Do note that you might have to provide additional documents
4. Satisfy all the eligibility criteria
Financial institutions provide collateral free loans to individuals between the ages of 25 and 55 years. Also, your business has to be at least 3 years old to be eligible for such a loan.
Bajaj Fiserv is an NBFC that sanctions collateral-free Business Loans against only these two basic eligibility criteria.
5. Check the loan amount availability
Financial institutions provide a business loan eligibility calculator that tells you the loan amount you are eligible for based on your annual turnover, net profit, existing loans, etc.
Applying for the right amount is critical as lenders can reject your application if you ask for an unreasonable amount. And, application rejections will lower your credit score.
6. Calculate your EMIs
You can calculate your collateral free loan EMIs by using a loan EMI calculator. It tells you the EMIs based on the loan principal, rate of interest, and tenor.
Using this calculator also helps to determine the tenor. A longer tenor makes the EMIs affordable but increases the total interest payable. Similarly, a shorter tenor has the opposite impact.
Following the above enables you to avail a loan effectively. Make sure to prepare your organisation for a business loan before you apply for one. Opt for lenders who offer the most beneficial terms to make your loan repayment as easy as possible.