If you want to apply for business loans without any security or collateral or do not have sufficient assets, you can go for unsecured business loans. There are various types of loans of this category that are available in India. You may require funds at various stages of the business, so an idea about different types of unsecured business loans would be of help. Choose a specific type of loan or a combination of loans as per your eligibility, requirement and repayment abilities. Read on to learn about the features of different types of unsecured business loan in India.
There are several types of unsecured business loans that include the following:
Working capital loans
You can use it to meet the daily funds for running a business, for example, buying machinery/equipment, managing cash flow for business, purchase of raw materials, increase in inventory, paying salaries to workers, etc. They are mostly short-term loans in which the repayment tenure is approximately few months to a year. However, the lender may set a limit for the loan amount and you have to use it for specific business purposes.
You have to repay back the loan in fixed EMIs (equated monthly instalments) or other forms of repayment over a period of time, specified by the lender. This loan is of two types – short-term and long-term. The repayment period can vary between a few months up to a few years and depending on their duration, the loans are short-term and long-term. The loan amount also varies along with the unsecured business loan interest rate. You can get a loan for few lakhs or up to crores.
Letter of credit (LOC)
It is a type of loan where the lender provides a guarantee of providing funds. If you deal in international business, related to either imports or exports. For example, shipping cargo material to foreign countries by vessels via waterway. When you deal with suppliers, with whom you are not acquainted much. The LOC would assure your supplier of guaranteed payments from your end. LOC is an important part of international trade.
It is a funding offered by lenders, including banks, where you can withdraw cash from your account. In form of a loan, even if your account balance is zero. The lender will charge an interest rate only on the amount that you have utilised and not on the entire sanctioned amount. The loan amount would depend on your relation with the lender, your credit history, and other factors. The lender may revise the overdraft limit and its use every year.
You may apply for government loan schemes, especially if you are a small business owners. Avail unsecured business loans at comparatively lower rate of interest than other lenders. These loans are mostly available for start-ups, micro and small enterprises, etc.
POS Loans or Merchant Cash Advance
If you want to pay a lump sum amount in advance to your suppliers through your credit or debit card, you can go for POS loans. The interest rate for POS loans is usually high compared to other types of business loans. You can repay through your debit or credit card. It is a type of cash advance and based upon the credit card sales deposited in a merchant’s account. The loan amount will depend on the frequency of credit card usage, monthly volume of business, etc.
It is also known as invoice discounting where the seller in a business transaction gets an advance fund at discount from the lender. The buyer has to provide an interest rate payment, monthly fee, etc, to the lender.
You may require an additional amount of loan over an existing business loan. This is known as top-up loan. You can club both the loans and pay a single EMI for both the loans instead of repaying them separately.
Starting a business venture, carrying on the daily operations, coping with losses or expanding. An existing business, all of these processes require different amounts of funds. In case you are planning for a loan without collateral. There are various types of unsecured business loan in India offered by different lenders, that you can use as per your requirements. You can compare between the loans available and select the appropriate type meet the fund requirements for your business.