What Are Collateral Free Loans, Its Features & Advantages

The popularity of a business loan has increased immensely since the past years in India. This can be partially attributed to the increased employment in the business or the industrial sector in the country and the advent of independent businesses.

Nowadays, there is a boom of small businesses as more and more people are inclining to run their own small-scale business instead of working for a corporate 9-5 job. Earlier, the businesses were considered a risky career choice by many, whereas now the thought has shifted to see them as an impressive source of building their empire.

The increased business and marketing shift among the common professionals has naturally left an impact on the money-lending institutions as well. As more people venture out to start their own business, the need for a good financial resource is at an all-time high. With a tough and competitive market ahead of them, these entrepreneurs are trying their hardest to make their businesses unique and better than others.

This shift in the agenda of business owners was not missed by the government as well. As a result, there has been a pool of government schemes or new policies to appreciate all the small and micro-businesses and help their expansion.

These strategies came in the form of business loans. These provided the initial investment to small as well as large businesses that helped them build a strong foundation. They helped the small-scale business owners to start a business or expand it further without getting burdened by being financially handicapped.

Why Is There A Need For A Collateral-free Loan?

While many rejoiced on the incoming business loans and lending strategies, some still found it difficult to mitigate their business investments. This proportion of business owners were majorly the small-scale entrepreneurs. So, what was the problem?

The answer to this lies in the characteristics of these business loans. The business loans that were initially projected for the business owners had a mandatory provision of a security agreement that involved the business or the owner to submerge collateral or a mortgage to avail of a loan with the lending-authority. The said collateral is included under the lending authority’s possession until the loan repayment has been made. A failure of repayment results in the collateral loss as the institution takes it over as compensation.

This practice seemed to be feasible to some of the business owners, particularly those who already had a good financial asset resource before getting the loan or those who were functioning on a much larger scale. But the remaining entrepreneurs who were deficient in the assets and capital were unable to provide something as collateral for the loan. Thus, these business owners failed to procure funds from a business loan.

The lending institutions soon recognized this hurdle of small-scale or micro-businesses, and development was made to announce certain collateral-free loans in the country. These further proved to boost the growth of small businesses and businesses in the industrial sector.

What Is A Collateral-free Loan?

A new concept has been put on the forefront of business loans- The Collateral Free Loans.

Under such types of loans, lending institutions such as banks or private lenders do not ask for an indemnity or security in exchange for a loan. There is, therefore, no need for the business owner or the money borrower to put an asset like a property or stocks under risk to fulfill the need for financial aid for his/her business.

Therefore, collateral-free or a non-security-based loan is more appealing to the entrepreneurs as they can move forward with their business venture by utilizing the funds from loans. They can all this without putting either their personal or business assets in jeopardy.

As a greater number of business owners showed interest in the collateral-free loans, many banks and the NBFCs have launched new collateral-free business loan plans. These loan plans were essentially targeted towards the SMEs that operate in India.

What Are The Features Of A Collateral-free Loan?

Before diving into the different collateral-free loans available in India, it is important to understand the fundamentals and features that are the characteristics of a collateral loan.

• The margin of funds: Under the guidelines of the MSMED act 2006, the collateral loans sanctioned in India will be able to disburse a loan amounting to a maximum of Rs.1 crore. This was the upper limit set by the act’s terms and conditions. Thus, Small and Medium Enterprises can avail of a hefty loan for their business corporation.
• Eligibility of SME: The collateral loans are available to be sanctioned for both pre-existing as well as any newly established Small or Medium scale enterprises. The loan guidelines don’t restrict the loan disbursement to only the new enterprise.
• Conditional security: A distinctive information to keep in mind while requesting the fund’s amount as a loan is that the higher valued funds are sanctioned with some security. Although the security is of a lower grade than that required by a secure-based loan, there is a pre-requisite for smaller security for the very high-end fund requests. This security is variable depending on the type of enterprise and loan history.
• Type of loan: Under such collateral-free loans, the business owner may select a working capital loan when the objective is to perish the day-to-day business operation costs, or the owner can go for a term loan when the objective is the enhancement of the owned capital assets.
• Term of loan: Such type of loan is generally availed on a short-term basis as they do not involve any indemnity. Certain banks do allow sanctioning of collateral-free loans on a long-term basis, but they involve a set of interim rules and regulations attached to the loan.
• Loan interest rates: Under a collateral-free loan, the business owner has to pay an interest rate ranging between 11.5%-22%. The rate of interest depends on the type of NBFC or Bank selected to avail the loan. The interest rates are higher because the loan is non-secure in nature.
• Loan repayment period: Being a short-term loan facility, the collateral-free loans’ repayment period is on an average of 5 years. This period may vary from one bank to another.
• Special margins: The collateral-free loans have the facility of providing the business owners with a business margin based on the entrepreneur or applicant category. These allotted loan margins may range from 75%-85% on a category basis.

What Are The Advantages Of Availing A Collateral-free Loan?

Now comes the advantages offered by the collateral-free loans. These schemes are evident from the attention and popularity that they hold some great benefits under their wings.

• Security free loan sanctioning: One of the most attractive benefits associated with such type of loans is the exemption of any security before loan approval. These loans remove the risk of losing an asset upon failure of loan repayment that may put the business owner on edge. Thus, even those small or medium scale enterprises that lack the count of any business-related assets can apply for such loans and draw their business funding. On top of that, the collateral-free loans do not need the business owner to seek a third-party authentication for the loan application.
• Convenient loan application process: As the collateral-free loans fall in the category of non-secure loans sanctioned on a short-term basis, the loan application and approval process are very quick and struggle-free. The loan application can be approved after verification within 5 days of applying. This is especially the Working Capital Loans case, where it is easy to get the requested funds for a business. The loan application process also does not require a history or track record of the applicant’s financial status.
• Greater interest rates: As these loans appear on the riskier side of business loans, the corresponding interest rates are higher than other kinds of loans. However, one bright side of this facet is the borrower can negotiate the interest rates according to the amount of loan requested, the employment status of entrepreneurs, and their income rate. Thus, the interest rate may be up for modifications.