Collateral is a business asset, having a tangible financial value, that a business can borrow against. Collateral generally comprises assets like real estate, machinery, vehicles, stocks and shares, inventory in good condition that can be pledged to avail a loan. However, in case of inability to service the business loan, the lender has the right to permanently take over possession of the asset and liquidate it to recover the outstanding dues.
On the other hand, collateral-free loans do not require the pledge of any asset as security. It brings considerable peace of mind to the owner of an SME business with a limited asset base and provides business growth opportunities. Further such business loans can be applied to diverse business purposes. We shall study the eligibility, interest rates and other features of the SME loans without collateral.
The Small and Medium enterprises industry contributes 45% to India’s manufacturing sector and a sizeable 40% to Indian exports. In other words, SME comprises the backbone of the Indian economy.
The Reserve Bank of India (RBI) defines “SMEs as small-scale industrial unit, an undertaking in which investment in plant and machinery does not exceed Rs.1 crore, except in respect of certain specified items under hosiery, hand tools, drugs and pharmaceuticals, stationery items and sports goods, where this investment limit has been enhanced to Rs. 5 crores”
SME loans without collateral permit raising of additional funds without curtailing operational costs to meet any unexpected business expenditure or expansion opportunities.
A business may need immediate finance to cater to business expansion, hiring of skilled expertise, purchase of inventory or equipment or to invest in new infrastructure. With the rise of adoption of technology by fintech lenders, applicants have the option of a plethora of SME loans as per business needs.
The eligibility criteria remain as follows:
- Turnover limit: Most NBFCs mandate a minimum turnover of Rs 40 lakhs.
- Vintage: Many lenders insist on an operational period of at least 3 years. However, if the business unit has 2 years of audited financials and it meets the credit acceptance criteria of the lender, then a loan would be offered.
- GST compliance: The SME should be GST compliant
- Income tax Returns of the Business owner: NBFCs collect the IT returns filed in the individual capacity of the business owner.
- Age limit of the loan applicant: The loan applicant age group should range from 21 -65 years i.e. the working age group.
The interest rates vary from product to product and range between 18% to 24% on reducing the rate of interest. Hence the pricing of the interest rates, offered by fintech lenders is competitive.
The best business loans offered by fintech lenders have the following in-built features:
- Unsecured business loans are 100% collateral free
- The business loans can be availed for the following business purposes: Balance transfer, loan consolidation, working capital requirement, commercial expansion or addition of branches, offices etc., any other business expansion plan. Some examples include:
- Lease bigger office premises or renovation
- Purchase, lease or repair of machinery and equipment
- Technology upgradation
- Purchase of inventory
- The hiring of skilled seasonal employees
- Purchase of raw material for bulk orders
- Capex plans
- Scaling up operations to service big contracts
- The tenure of the SME loans ranges from 6 -36 months
- Interest rates differ from product to product and are priced between 18% to 24% on reducing the rate of interest
In conclusion, collateral-free Business Loans for SMEs, extended by fintech companies, have several flexible clauses, which undoubtedly make them the best business loans. Businesses can borrow according to their needs and repay as per their cash flow cycle, by structuring the repayment frequency accordingly. There is also a facility to pay only the interest amount as EMI while repaying the principal amount at the end of the loan tenor. Further, the loan application, the approval process is completely online, without the need to physically visit the lender’s office. The applicant has 24*7 online loan account access.