Planning for a new business set up requires substantial funds, and individuals want business loans without pledging any collateral. With collateral free loans, individuals can fund their equipment expenses, working capital and other essential business requirements.

Although a business loan without collateral is helpful for borrowers, there are some pros and cons associated.

Pros of collateral-free loans

Let’s check out the following advantages of an unsecured business loan-

• Faster approval

As in an unsecured business loan, there is no requirement of pledging an asset, loan amount is processed faster and disbursed quickly. Minimal documentation is one of the best features for unsecured loans. However, the lenders need to be assured that the borrower runs a legitimate business and can run the business successfully.

• SME funding

To set up a business, be it small or big, one needs financing. There are various ways of securing funds for a business nowadays, and business loans are one of the best ways to gather funds for both MSMEs and SMEs.

• The loan amount is unrelated to the asset value

The loan amount does not depend on the asset value one has, as collateral free loans do not demand any security to avail funds. Therefore, borrowers can avail of a substantial amount based on their eligibility, creditworthiness and upper limit extended by lenders. Borrowers must note that in case of secured loans, one will get only a certain percentage of the pledged property as a loan.

• Improve credit history

When borrowers repay loan instalments diligently, it helps them to build their credit score and improve creditworthiness. This means that if the borrower applies for any loan in future, their application will be approved quickly.

However, most financial institutions check credit scores carefully before sanctioning a loan amount, and if a borrower fails to possess a healthy credit score, their loan application will be rejected. Hence, to avail of an unsecured business loan without any hassle, borrowers need to know the concept of CIBIL score and its impact on business loan.

• Easy repayment options

Reputed financial institutions offer flexible repayment schedules so that borrowers can choose the most suited option based on their requirements. In this way, they can avoid payment defaults.  However, to ensure hassle-free repayment, borrowers can use a business loan calculator to know the monthly instalments payable against their loan amount.

• Flexi loan facility

Business loans allow borrowers to withdraw cash multiple times in a day from a pre-sanctioned limit. Moreover, they have to pay interest only on the amount utilised or withdrawn.

Cons of unsecured business loan

While this is true that unsecured business loans have several benefits, there are few drawbacks. Here they are-

• Higher interest rates

One of the major disadvantages of collateral-free loans is the interest rate which is comparatively higher than secured loans. Since the risk factor is higher in unsecured loans, lenders charge higher interest rates. But it is to be noted that interest rates depend on one financial lender to another.

• Requires high credit score

Since lenders do not ask for collateral in unsecured business loans, they assess the borrower’s credit score and repayment capability thoroughly. As a result, borrowers require a higher credit score before availing a considerable loan amount.

• Loan liability

A collateral free loan does not free a borrower until the due is repaid. Financial lenders can even take legal actions against the borrower if they default in payments.

Apart from the advantages and disadvantages of business loans, eligible borrowers can also avail pre-approved offers extended by India’s leading financial lenders like Bajaj Finserv. These offers are available on a host of secured and unsecured financial products to streamline the loaning procedure. Therefore, intending borrowers can check their pre-approved offers online by submitting their essential contact details.

Thus, collateral-free loans can be availed for large or small business needs, requiring urgent funds to meet various business requirements. To conclude, it can be the best or worst for the borrowers based on several variables, including a borrower’s financial condition.