When you are planning to start a business, the important factor is finance. These days all entrepreneurs opt for business loan to fund their venture. However there a few formalities required to obtain such loans which decide the eligibility criteria. It depends on whether you want to avail of secured loans or unsecured loans.
- Secured Loans-
A secured loan is which is given against any asset called Collateral. This is a repayment mode if the borrower defaults on the repayment. A collateral could be a house, a car or ornaments of gold etc. A loan with collateral or a Secured loan is normally used by traditional financial institutions.
- Unsecured loans-
An unsecured loan does not require any collateral. If you do not have enough assets or you do not want to take the risk of losing your asset these loans are the best option. However, these loans are protected by either of the following two options:-
- A personal guarantee – It means that if your business defaults on the loan, then you as a person will repay the loan personally, with your assets.
- A blanket UCC lien – Here the lender can take any of your business assets like machinery etc to cover Default repayment. So there are alternative lenders who offer quality unsecured loans. Although they might have higher interest rates and short terms of repayment than a traditional loan yet many times the amount of loan could be a larger one.
Some of the options of unsecured loans are:-
- SBA loans
It is a popular option as it is backed by the Small Business Agency a federal agency. They however have strict eligibility requirements. Also , they offer loans with collateral. So it is important to scrutinize beforehand.
- Online term loans
These are short term and long term loans. In short term loans, the lump sum given to the borrower is repaid weekly, monthly within a short period of 3 to 18 months. Long term loans the lump sum is repaid monthly but in an extended time.
- Merchant Cash Advance
This type is an expensive option where the financer provides a merchant cash advance it is against a percentage of future sales of the company. It is somewhat complex as various factors need to be considered. The cash flow of business could also be affected, so the borrower needs to be cautious enough before applying for this loan.
- Business Credit cards
It is a popular and one of the good options. It comes with a zero per cent APR with a duration within 15 months for repayment. It is usually interest-free.
- Private lenders and Finance firms
These also offer loans without collateral.
- Franchise options
If the borrower has a franchise under a brand name, it is easy to apply for a loan without a collateral as the brand name has its brand advantage.
- Points to consider before applying for unsecured business loan
- Market Research – It is important to do thorough market research before applying for such loans to identify suitable lenders, interest rates and the time of repayment.
- Improve Credit score – It is important to keep a good credit score and better not to avail of any other loans to improve your credit score. This increases the chance of getting a good loan amount as well as a good interest rate and a good bargain.
- Documents required – It is important to keep the basic document ready such as photos, pan card, Address proof, Balance sheets, bank statements, loan track record etc to reduce the time for completing the formalities.
- The loan can be prepaid using Electronic Transfer from Bank or through post-dated cheques.
So finally before you apply for business loan it is important to understand your readiness and financial position, whether to opt for secured or unsecured loans without the collateral. The interest rates may be higher but the paperwork is less compared to traditional loans. Mudrapay offers loans at minimal paperwork and attractive interest rates.