Types of Unsecured Business Loans in India | Complete Guide – Unity Bank
5 min read | 3 months ago
Unsecured business loans provide businesses with a way to secure funding without putting up collateral, making them especially attractive for small and medium-sized enterprises (SMEs) that may lack significant assets. These loans offer flexibility and accessibility, allowing businesses to focus on growth without the burden of pledging property or equipment. This guide will explore the various types of unsecured business loans available in India, highlighting their features, benefits, and potential use cases.
1. Term Business Loans
Term business loans are one of the most common forms of unsecured financing. They provide a lump sum amount that is repayable over a fixed period, usually with a predetermined interest rate and repayment schedule. These loans are ideal for businesses that need a significant amount of capital for expansion, purchasing equipment, or other long-term investments.
Key Features:
- No collateral required, making them accessible for new businesses or those with limited assets.
- Flexible repayment terms, typically ranging from 1 to 4 years.
- Fixed EMIs, which help in better financial planning.
Best For: Business expansion, purchasing equipment, or any planned business investment that requires substantial upfront costs.
2. Working Capital Loans
An overdraft facility allows businesses to withdraw funds from their existing business account up to a pre-approved limit. Unlike other loans, interest is charged only on the amount withdrawn, making it a cost-effective option for managing unpredictable expenses.
Key Features:
- Flexible access to funds with interest charged only on the used amount.
- No fixed repayment schedule; repayments can be made as funds become available.
- Ideal for ongoing and short-term needs without the commitment of a term loan.
Best For: Managing operational expenses, buying inventory during peak seasons, or bridging cash flow gaps during slow periods.
3. Overdraft (OD) Facility
Working capital loans are short-term unsecured loans designed to cover daily operational expenses and manage cash flow gaps. These loans are perfect for businesses experiencing seasonal fluctuations in revenue or needing funds to maintain daily operations without interruptions.
Key Features:
- Short-term duration, usually ranging from 6 months to 2 years.
- Quick approval and disbursal, often within a few days.
- No need for collateral, relying instead on the business’s creditworthiness.
Best For: Covering unexpected expenses, managing day-to-day cash flow, or handling short-term funding needs.
4. Business Line of Credit
A business line of credit operates similarly to an overdraft but is often structured with a higher credit limit and more flexible terms. This type of loan allows businesses to draw and repay funds repeatedly, up to a certain limit, providing a continuous source of working capital.
Key Features:
- Revolving credit, allowing funds to be withdrawn, repaid, and redrawn as needed.
- Ideal for managing cash flow, financing operational costs, or covering unexpected financial shortfalls.
- Typically, interest is only paid on the amount used.
Best For: Businesses that require ongoing access to funds rather than a one-time lump sum.
5. Invoice Financing
Invoice financing allows businesses to borrow money against their outstanding invoices, providing immediate cash flow before customers pay. This is particularly beneficial for businesses that have long payment cycles and need to maintain liquidity.
Key Features:
- Quick access to funds based on accounts receivables.
- Helps maintain steady cash flow without waiting for customer payments.
- No need for traditional collateral; the invoices themselves act as security.
Best For: Businesses with a long billing cycle that need immediate cash for operations or expansion.
6. Government-Backed Financing Schemes
In India, various government schemes provide unsecured financing to support SMEs and startups. Notable programs include the Pradhan Mantri MUDRA Yojana (PMMY), Stand-Up India, and the Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGTMSE). These schemes are designed to boost entrepreneurship and provide easy access to capital for eligible businesses.
Key Features:
- Subsidized interest rates, making them more affordable compared to private unsecured loans.
- Simplified application processes and support from government institutions.
- Suitable for new and growing businesses that meet specific scheme criteria.
Best For: Startups, micro-enterprises, and small businesses seeking accessible funding with government support.
Conclusion
Unsecured business loans offer an excellent opportunity for SMEs and startups to access much-needed funds without the need for collateral. From term loans to working capital loans, each type of unsecured loan serves specific business needs, allowing companies to choose the best option based on their financial requirements. When selecting the right unsecured loan, it’s essential to assess your business’s needs, repayment capacity, and the loan’s terms to ensure it aligns with your growth objectives. You must also choose the lender carefully, be it an NBFC, a traditional bank, or a small finance bank.
By understanding the various options available, businesses can make informed decisions and leverage these loans to drive growth and operational success.
About Unity Small Finance Bank
Unity Small Finance Bank is committed to making banking simpler and more accessible for everyone. Our services include Savings Account, NRI account, Current Account, Fixed Deposits, and Personal Loans offering flexible tenures and attractive interest rates. We also offer financing options like MSME Loans and Microfinance to support businesses and underserved communities. Learn more about Unity Small Finance Bank here.
