Unsecured Loans for Business

It is said that “Finance is the lifeline of Business” and is actually true, because without funds, nothing moves in Business.

A businessman resorts to multiple avenues to ensure that the business does not suffer owing to lack of funds. Initially, he puts in his own capital or borrows from friends & family to run the show. In case that is not sufficient, then he normally looks upon the Banking channel to come to his rescue.

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Normally, getting sanction from Banks and availing it is a very tedious, time consuming and long drawn process - particularly for first time borrowers - until the same is properly planned and approached professionally.

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Even for existing borrowers, it’s not a cake walk - particularly because of the fact that the decision process in a Bank is a time consuming process owing to their internal process of preparing the appraisal note, meetings, internal ratings & evaluation, taking the proposal to the committee for sanctioning, risk assessment, etc.

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Hence, at times - to keep the clock ticking and to ensure that funds do not dry up - the businessman looks in the direction of Unsecured Loans. Let us discuss this more in detail:

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2 Columns and 5 Rows Table

Topic	Description
What are Unsecured Loans?	Unsecured Loans are basically loans taken from Banks / NBFCs / or any other entity (related / unrelated), without offering any collateral / security, so as to avail such loans. Even money taken by way of Inter Corporate Deposits (ICDs) shall qualify as Unsecured Loans. Nevertheless, the personal guarantee of the Promoter is directly / indirectly given for availing such Unsecured Loans.
Size of Unsecured Loans	These loans are typically small in size and may vary from a few lakhs of Rupees to about Rs. 2 crore (basically less than 5 crore). Any amount, over and above that - the lender shall start insisting for some security. Nevertheless, it also depends upon the conduct of the borrower in the recent past and also on the size of the present business.
Interest Rate	The interest rates are predominantly higher for unsecured loans as compared to secured business loans - simply because of it being unsecured and the lender needs to be compensated more for taking such risks. The interest rate on such loan varies depending upon who is the loan provider - as mentioned below: If taken from Banks - around 14-15% If from NBFCs - 1-2% higher than Bank’s rate (so, around 15-17%) If taken by way of ICDs - anywhere between 12% - 20% (depending upon the need of the respective party) If taken from friends, relatives or personal files of family members - the rate is subjective and is charged at the mutual comfort level of the respective parties / keeping in mind taxation aspects. Interest on these loans can be paid at different time intervals, like monthly, quarterly, half yearly or even annual - depending upon case to case basis. At times, interest is not even paid at the year-end and the outstanding interest is added to the principal outstanding and the total accumulated amount becomes the new principal for the next year.
Processing Fees	Most of the lenders charge a processing fee of around 1% of the sanctioned amount. However, the same varies on a case to case basis, depending upon the size of the loan, profile of the borrower and how strong your negotiation has been with the lender.
Repayment	Unsecured Loans are normally demand loans implying that these need to be repaid as & when asked back by the lender. However, banks and NBFCs generally offer this for a period of less than one year (since these are short term in nature). However, on a case to case basis - the period can even get extended up to 1-3 years as well.
Criteria of giving Unsecured Loans	These loans are offered to entities to manage their short term liquidity issues. However, following factors are considered while offering such loans: Credit worthiness of the borrower which can be checked through the CIBIL score of the entity and of their owners Purpose for which such loans are being taken and the associated tenure. Historical & Present Financial Position & Performance Analysis of GST Statements, Bank Statements and Financial Documents Reference Check about the Borrower
Advantages	Faster processing as compared to secured loans No security needed No restrictions on end use. One is free to use for business purposes, as they like it.
Disadvantages	Costly Available for short term only Repayable on demand Personal Guarantee can get invoked if not repaid timely.

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It is pertinent to note that if such loans are provided from Promoters own sources / family members - it is strongly advisable to present them to the Banker as quasi-equity (instead of showing as a normal debt). This in turn improves the overall debt-equity position and makes the borrower profile stronger.

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In case of any expansion, many times the promoter infuses a portion of their contribution by way of such unsecured loans. These loans are then treated as subordinate to Bank’s Term loan implying they will be in the system till the time Bank’s loan is repaid.

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Finally, to conclude - one should resort to external unsecured loans only when they need funds urgently and that too in a quick turnaround time. Parallelly, they should try to arrange funds from alternative cheaper sources (if possible) and get rid of them at the earliest. To know more contact us at BankKeeping.