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An existing business might require a loan to grow the business.
Loans, time and again are used by startups & businesses to grow their business.
They form an important part of our economy helping businesses grow.
The loans which bank disburse are divided into two type of loans called as:
A. Secured Loan
B. Unsecured loan
Secured Loans:
Secured loans are the loans bank give you against a guarantee in the form of an asset. It could be a property or any asset owned by you.
The purpose with such kind of loans is to secure banks i.e. in case, your business fails tomorrow, the bank can recover their money using the assets you had given them.
This kind of loan can easily be availed from the banks.
The usual asset mortgaged by the public here are property and jewellery.
Unsecured loans:
An unsecured loan is a loan which you get from a bank without any security.
Security here refers to Jewellery, property or any asset against which bank decides to give you money (or loan).
Getting an unsecured business loan for startup is difficult because of the high percentage of risk associated with such loans.
New businesses or start-ups can get an unsecured loan using one of the govt schemes like MUDRA etc.
The risk here is taking care by Government. Under the schemes, any individual can approach the bank and get loans under 10 lakh depending on their project report and eligibility.
Usually, government banks provide loans under these schemes. Private banks do not entertain any such schemes where they have to share a huge amount of risk.
I do not even blame them. New businesses have high chances of failure. Private banks are not there to invest money in ventures which have such high percentage of risk for failure.
But the story changes, when existing established businesses approach Private banks for unsecured loans.
The banks review their balance sheet, ITR, Financials, and CIBIL Score the assess the banking and credit rating of the business.
Eligible businesses or start-ups are then given the unseured loan based on companys balance sheets and track record of companys directors.
The general time duration for unsecured loans is ranging from one year to three years with monthly installments set for each month.
The private banks charge anywhere in between 15 to 24% interest on an unsecured loan. Also, there is a 1.5 to 2% processing fees and insurance charges when you get the loan disbursed.
The unsecured loan facility can also be availed by NBFc like Bajaj Finance, TATA capital, Capital first.
Although, their interest rate is high. The process of availing the loan is a little easier in comparison to banks which might only entertain you if you have an existing banking with them.
Which loan should you go for?
If you are a startup/new business without any asset, try availing loan through governments schemes. You can know more about these schemes by approaching any of the govt. banks. For existing businesses without any security, private banks are a better bet.
They are quite open to giving unsecured loan and will entertain you if you have a good clientele, a positive balance sheet, and good or consistent growth chart.
For business owners who have property, you can give your property as a security to the bank.
Banks usually get the property evaluated by 3rd parties and will fund you 50 to 75% of your property value depending on existing market rates.
Loans for business without security is never a win-win situation for both the parties as lenders are always at risk of losing money and the business taking the loan pays a very high interest which might eat into companys profits from day one.
I usually do not recommend such loans for anyone but when businesses are in need of money, the unsecured business loan is an option which always helps.
It is a lucrative business for banks. This is the only reason why so many NBFCs have started funding businesses charging them an astronomical amount of interest rate on the money given to them.
Irrespective of high interest rate charges, the demand for unsecured business loan remains high with businesses owners to fund their business.
