Many young entrepreneurs start their small businesses or plan to start one in a pursuit to follow their passion and dreams. However, creating a new small business is not easy. There will be a lot of bumpy roads ahead. The biggest roadblock a small business can face in its starting years is to face capital crunch. Lack of money to maintain the cash flows and pay for the operational costs is one of the biggest reasons that forces small businesses to fold up.
To mitigate this risk of getting blown up due to capital crunch, small companies often take loans from financers. If you are a small business owner, you can calculate the cost of taking a loan by using a business loan EMI calculator online.
There are various sectors to start a small business in. A small business can be as little as an individual working from his laptop to a group of people setting up small manufacturing set up. Following are some of the most common forms of small businesses:
- Currency Trading
- Data Entry Expert
- Daycare services
- Juice or Sandwich Corner
- Placement services
- Professional Photography
- Real Estate Brokerage
- Social Media Expert
- Takeaway Point
- Travel Consultant
- Tuition Classes
- Web Designing
- Wedding planning
The one thing that is common with most of these businesses mentioned above is that you require capital to scale them up and increase your revenue. There are two kinds of loans available in the market.
- Secured Loan: A loan taken against collateral. Here, you keep an asset that you own as security against which you can avail the loan. The inherent safety provided by the collateral makes this loan cheap and attractive. You can negotiate better terms with your financer and get a more significant amount as a capital infusion for your business.
- Unsecured Loan: This is the type of loan for which you don’t have to put anything as collateral. If your credit history is good and the lender has trust in you, then it will release the money for your business.
If you don’t have an asset to put as collateral, then taking an unsecured loan is the only viable option to raise capital for your business. Financial institutions offer grand schemes in this category at beautiful interest rates. All the terms and conditions of taking a business loan application in this scenario too. Let us now understand more about unsecured loans and how they compare with secured loans.
Types of Unsecured Business Loans
- Term Loan: This loan is available for a fixed period which is non-negotiable. The EMI is calculated based on the amount on the loan you want. If you’re going to do the calculations yourself, you can use a business loan EMI calculator online to do so.
- Working Capital Loan: To meet the day-to-day operational expenses of the business, small business owners avail of this type of loan. Both your personal and the business’s credit history is verified before this loan can be availed.
- Overdraft: In this agreement, a certain amount of money is fixed as the upper limit for the loan amount. The borrower can avail of this money in part as and when required within the mentioned period and the interest will be charged only on the amount used by the borrower.
- Government schemes: With the push coming from the Government of India to promote small business and put them in the larger picture, there are a lot of Government Schemes under which small business owners can avail of unsecured loans from the financial institutions.
- Business Credit Cards: Many financial institutions in India provide business credit cards to entrepreneurs. The interest is charged on the usage of this card. It can work as working capital for your business while the limit of the card is decided by the credit history of the owner of the business.
Following is a detailed comparison between an unsecured loan and a secured loan based on various parameters.
|Parameters||Unsecured Loan||Secured Loan|
|Interest Rate||Higher||Lower than Secured Loan|
|Loan Amount||Depends on Credit History||Depends on Value of Collateral|
|Tenure of Loan||1-5 years||5-30 years|
|CIBIL Score||Need a good CIBIL Score||Not an important parameter|
Eligibility for Unsecured Business Loan
The following are the standard eligibility criteria required for business loan to be fulfilled by the borrower to avail of an unsecured loan.
- Age: Minimum 21 years of age at the time of loan application and maximum 65 years of age at the time of maturity of the loan
- CIBIL Score: 650 or above
- Business: Business should have existence, operating from the same location, of at least one year with signs of profit
- Business experience: The borrower should have at least two years of relevant business experience in the same field.
Hence, applying for a business loan is a viable option for small businesses. Just make sure that the amount you are applying for is manageable or else, the EMI will start eating up your profits.