An unsecured business loan is a popular collateral free loan option provided by banks and NBFCs in India. This type of unsecured commercial loan is perfect for MSMEs and other business, looking for fast & short-term working capital, without pledging any assets. This unsecured loan is provided in the form of term loan or unsecured overdraft (unsecured OD). The loan amount ranges from Rs.10 lacs to 1 crore from each lender for the repayment period of 3 to 5 years. For loan amount more than Rs. 1 crore, SME Fundings can help you navigate the process to secure a higher unsecured corporate loan from a consortium of lenders.

Deriving eligibility for unsecured business loans is a complex process as it involves assessment of multiple financial parameters of the loan applicant. However, two basic criteria looked into by lenders while assessing unsecured business loan proposals, are:

• 1) Repayment capacity of a borrower:
• Repayment capacity of a borrower is assessed with the help of various documents like Income tax returns, Financial Statements & Audit reports, GST returns, Bank statements, existing loan obligations and loan repayment statements. Accordingly, there are multiple Eligibility criteria for unsecured business loans, which are used by lenders. The common parameters used to derive loan repayment capacity for business loans are Profitability, Average bank balance, GST Turnover margin, Repayment track records (RTR) etc.
• 2) Intention of a borrower to repay:
• This is another important parameter used in assessment of unsecured business loan proposals. Borrowers having good repayment capacity, may reflect poor Intention for loan repayment from various loans availed in the past. This may be due to borrower not giving due priority for loan repayment. The intention is checked with the help of credit report (Cibil) of a borrower, which reflects month wise repayments done by borrower for all loans availed in the past. So, even if borrower meets all credit criteria but does not have good intention, loan cannot be sanctioned.
• 3) Business Stability:
• Business Stability gives confidence to the lender about the promoter’s ability to run the business profitability for longer period. For small unsecured business loans, stability of minimum 1 year is sufficient. However, for larger loan eligibility, minimum business stability of 3 years is required.

• Easy Application & Documentation: Application process & documents required for unsecured business loans are very less as compared to other secured loans. It can be submitted online within few minutes.
• Speed of sanction: Unsecured business loans are sanctioned within 1 to 3 days, after all documents are submitted. It means, borrower can get money in hand, when it’s needed the most.
• Multiple Eligibility Criteria: Business loan sanction does not depend upon only one criteria. Rather there are many different criteria for different lenders like Profitability, Average bank balance, GST Turnover margin, Repayment track records (RTR) etc. If you are eligible for any one or two criteria, your loan can be sanctioned.
• Collateral Free Loan: Being as unsecured loan, no property collateral is required. Hence, borrower an avail this loan very easily, only by submitting basic documents.
• Flexible End use: Loan availed from unsecured business loan can be utilised for any purpose like working capital, business expansion, purchases, bridge loans, payment to suppliers etc.
• Higher Loan Amount: Unsecured business loans are available from Rs.10 lacs to Rs.5 Crores, depending upon financial eligibility of a borrower. Higher the eligibility, higher will be the loan sanctioned.
• Fund Rotations in Business Cycle: Though the interest rates for unsecured business loans are little higher as compared to secured loans, borrowers can rotate these funds in every business cycle, multiple times in a year.

There is always a dilemma in borrowers mind whether to opt for secured business loan or unsecured business loan. Following differences between secured and unsecured business loan will help in such situation:

• Collateral Requirement: Secured loan is backed by property collateral while unsecured business loan does not require any property collateral. They are collateral free loans for business.
• Loan Amount: Secured loan is normally higher in amount, ranging from Rs. 50 lacs to 50 crores, while unsecured business loan is from Rs. 5 lacs to 5 crores.
• Repayment Tenure: Secured loans have longer tenure (7–15 years), while unsecured loans are short-term (2–4 years).
• Cost of Loan: Being unsecured in nature, risk for lenders is higher in case of unsecured loans. As secured loans are backed by property collateral, risk is lower for lenders. Hence, unsecured business loans are little costlier than secured business loans.
• EMI Burden: For secured loans, interest rates are low & repayment tenure are high. Due to lower repayment tenure & higher interest rates, EMIs of unsecured business loans are higher than secured business loan of same amount.
• Documentation: Documentation for unsecured business loan is much lesser than secured loan.
• Sanction Time: Unsecured loans are sanctioned faster. Secured loans usually require 15–30 days for sanction.
• Form of Loan: Secured loans are given in form of Term loan, Cash credit or Overdraft. Unsecured loans are generally given as Term loans, though unsecured working capital loans in the form of OD is also available.

So, Secured loans are good choice when the borrowers need higher loan amounts (Rs. 2 to 3 crores onwards), have sufficient property & other collateral and are looking for long term investment. Unsecured loans are the good choice for borrowers who are looking for short term funds as working capital, to meet fluctuating demands, for payment to suppliers, for raw material purchase, for rotating funds in the business etc.

Here's is list of documents required for Collateral Free Business Loan Proposal:

• Last 2 years IT return, Computation & Financial statements, Audit reports (as applicable)
• Last 12 months' bank statements (Current & CC/OD)
• GSTR 3B for the last 12 months
• Current loan sanction letters.
• Business Registration, Pan, MOA, AOA / LLP Deed/ Partnership Deed
• Business GST Registration, MSME Registration, Office address Proof
• Pan and Aadhar of Promoters / Partners / Directors