Business loan

Starting a new business and expanding it at the right time is an expensive endeavour for MSME owners with limited finances. A Traditional business loan is the most popular funding option among business owners. However, younger businesses with narrow finances and vintage may not qualify for them, as newer companies often have a shorter credit history. That is when an instant business loan provides the necessary funding at the right time. Unsecured Small business loans are specifically designed for newer, smaller businesses that cannot or do not want to take traditional business loans. 

Apart from stricter eligibility criteria, traditional loans have several other limitations that make unsecured business loans a better option. Below, find out the differences between unsecured business loans and traditional business loans to make an informed decision.

Loan Amounts

When applying for a business loan from an NBFC, entrepreneurs can get an unsecured loan of up to Rs 50 lakhs at competitive interest rates and flexible repayment tenure. A traditional business loan on the other hand may not provide a considerable amount without collateral security. What’s more, applicants can apply for an unsecured business loan online.

Collateral Requirement

Most traditional business loans are secured, which requires the security of an asset against the loan amount. The borrower pledges a residential or commercial property as collateral against the loan. If they default, the loan provider has the legal right to seize the property and sell it to recoup their money. On the other hand, an instant business loan from NBFC is unsecured that does not require the borrower to pledge property as collateral. So, even if the borrower faces challenges in repaying the loan, they don’t need to worry about losing their assets.

Interest Rates

Another significant difference between the two types of business loans is the interest rate charged on the loan amount. Since unsecured business loans are collateral-free, NBFCs charge a competitive interest rate. But then there’s no risk to the applicant’s property in case of default. On the other hand, traditional business loans are secured with collateral, so they might come with comparatively lower interest rates. However, the applicant’s property remains at risk, as the lender can sell it to recover their loan in case of default.

Repayment Tenure

The repayment tenure of unsecured business loan offered by the NBFCs have flexible repayment tenures. Borrowers can get a loan of up to Rs 50 lakhs for tenures of up to 36 months. Here, the loan can be applied for online, and the borrower can get the money in their account with minimal documentation after a quick in-person verification.

While traditional lenders may offer a higher loan amount based on the valuation of the collateral provided by the borrower. Depending on the amount, the repayment tenure may be of a longer duration. However, the loan approval takes time as the financial institution takes time to verify the documents and the collateral value based on the documentation.

End-Use Restrictions

Borrowers can use traditional business loans for limited activities as they must inform the lenders about how they plan to use the loan amount during the loan process. Loan providers check the applicant’s business plan before sanctioning their loan. On the other hand, unsecured business loans do not come with end-use restrictions. Borrowers can use the loan amount for any business-related purpose they want. Whether they need funding for marketing, staff hiring, inventory purchase, supplier payments, or workplace renovation, they can get a loan sanctioned.

Eligibility Requirements

Traditional business loan providers have stricter eligibility criteria that only a few SME owners can fulfil. On the contrary, instant business loan providers have simpler qualifying conditions that most business owners can meet without hassle. Most MSME loan providers have eligibility conditions related to the applicant’s age, business type, annual turnover, credit history, and DTI ratio. 

Documentation Requirements

NBFC loans have fewer documentation requirements than secured traditional loans. First of all, they are unsecured, which means they require no paperwork and formalities associated with collateral. Moreover, they have minimal documentation requirements with digital loan processing that one can complete easily.

These are a few differences between unsecured business loans and traditional business loans in India. An instant business loan is much easier to obtain and repay. However, those looking for a higher loan sanction at a low business loan interest rate in India can opt for traditional loans.

About the Author

Amaira Sharma is finance expert and former business growth strategist who has more than 8+ years experience in the industry, now she helps others to get better financial stability and standards. She loves to write useful tips on personal finance and businesses.

By Nora18

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