Unsecured Business loan, as the name suggests, is an unsecured loan exclusively designed for business purposes with a short tenure ranging from 12 to 36 months. A business loan is a financial instrument that helps MSMEs (Micro, Small & Medium Enterprises) in buying raw materials/equipment, processing the raw materials, maintaining business operations, setting up a new branch and so on.
Components of unsecured Business Loan:
- Private Banks and NBFCs offer loans between 5 to 75 lakhs with a rate of interest between 16-21 % based on the eligibility and financial strength of the business
- Short tenure between 12-36 months
- Unsecured with relatively simple documentation
- Business loans can be availed with multiple banks at the same time
- Banks look at a business seasoning of about 5 years and profitability for 3 years
- If a family or partners or directors have different sources of income, the incomes can be clubbed together to evaluate the loan proposal
Eligibility criteria for availing Business Loan
Most MSMEs feel that the banks evaluate the Business Loan proposal based on only profits. However, banks have multiple schemes / surrogates programs through which they evaluate the eligibility.
Income Program – the loan amount is evaluated based on the profitability and balance sheet strength of the MSME.
GST Surrogate Program – the loan amount is evaluated based on the GST returns and the regularity of the GST return filed by the MSME.
Average Bank Balance (ABB) Surrogate Program – the loan amount is evaluated based on the Current Account balance maintained by the MSME. Multiple Current Account balances of a single entity can be grouped to derive the Average Bank Balance
Repayment Track Record (RTR) Surrogate Program – the loan amount is evaluated based on the repayment capacity established by paying mortgage loans, other business loans, car loans, or any other term loan for more than 18 months.
Gross Margin Program – Loan amount is evaluated based on the Industrial Gross Margin or the Gross Margin shown in the Balance Sheet by the MSME.
Some of the important parameters for the Business loan to get approved are:
- Positive Profits
- Positive net worth
- Good past repayment records (expected CIBIL Score > 650)
- Business stability of over 5 years
- Promoter having fair knowledge about the business and involved in the business
- Healthy Banking Habits
- Regular and consistent GST / Statutory Payments
Where can business loans be utilised?
- Business loan can be used as margin money for buying machinery. While buying machinery, most banks ask the promoter to contribute 25% of the machinery cost before funding. Business Loan comes in handy in such situations and can be a medium through which promoters can raise this 25%.
- If the promoter wants to diversify, start a new business or expand the business to a new market, Business Loans can be availed.
- Business Loans can be taken to add to the working capital limits.
- If the promoter is looking at manpower expansion and wants to cover this expense until the manpower becomes productive, Business Loans can be used.
Many number of banks offer Business Loans
In metro cities including Mumbai, Delhi, Pune, Bangalore, Chennai and Kolkata there are around 30 to 35 banks that offer business loans. In tier 2 cities there are 8 to 10 banks and in tier 3 cities there are 6 to 8 banks offering business loans. A business can raise a loan amount of around Rs 2.5 to Rs 5 crore through Business Loan by availing it from multiple banks.
Note: PSUs and Cooperative Banks do not offer Unsecured Business Loans
List of Banks – That operate Business Loans