The business environment is dynamic. You will need timely capital infusion to ensure you seize profitable opportunities that come your way. However, as a business owner, you operate in a highly uncertain market where there is no assurance of sales volume or fixed revenue. Consequently, many lenders impose strict criteria to approve funding. Lenders either demand extensive documentation or require valuable collateral to disburse funds.
But what if your business is still in its nascent stage, you operate from a rented property, and even your equipment is on lease? Does this mean no approval? Keep reading this article to understand how funding is possible without collateral.
Tips to Obtain Business Loan Without Collateral
Let’s look at some easy-to-follow tips you can consider if you want to secure a business loan without collateral. For instance, if you want to obtain a Godrej Capital Business Loan, you can consider the following factors —
1. Improve your Credit Score
When you apply for a business loan without collateral, the lender reviews your personal and business credit reports. Credit bureaus like CIBIL prepare these reports. The bureau gathers information on your credit behaviour from different lending institutions and insurers and, based on that, assigns a three-digit credit score.
If this score is over 700, the likelihood of loan approval increases significantly.
If you have an average or poor score, take the following measures to improve it:
- Automate the EMI payments of your existing debts to ensure you do not miss the due dates.
- Limit your regular use of revolving credit, like an overdraft or business credit card, to no more than 30% of the available limit.
- Download your credit report once every year to check for any discrepancies. Bogus loans in your company’s name, incorrect names, or other financial details can also drop your credit score. If you notice any inaccuracies, immediately raise them with CIBIL in writing.
2. Lower your Debt-to-Revenue Ratio
You might have heard of scenarios where business owners earn several lakhs and have a strong credit report but are still denied a loan. In such a scenario, the problem lies in the debt-to-revenue ratio, which reflects how much of the company’s total revenue goes towards monthly debt obligations.
Usually, lenders prefer this ratio to be 50% or less. Let’s understand this with an example.
Suppose you are in the garment production business. Every month, you receive a bulk order to manufacture school uniforms, which involves a production cost of around Rs 2 lakh. Your company operates at a low-profit margin and makes a monthly revenue of Rs 4.5 lakh.
You are already paying Rs 85,000 in EMI for existing debt. If the EMI for a new loan is somewhere around Rs 70,000, expect rejection.
The reason is that after meeting production costs, existing EMIs, staff salaries, and utility bills, you won’t be left with much to handle the new debt.
The best you can do is to first clear a few of your existing debts and lower your debt-to-revenue ratio.
3. Have a Business Plan
Lenders are interested in learning about your business background, top management, and future plans. This will give them an idea of the risk involved in your business, whether your business has the potential to weather market uncertainty, and how open you are to adapting to innovations.
- Start by writing a company description. Here, you can mention your business model, vision, mission, and a brief overview of the company’s past. You must also outline your short- and long-term objectives in detail.
- Provide a detailed market and competition analysis. Illustrate what sets you apart from others and where you stand against your peers in terms of customer base, turnover, offerings, and pricing.
- Offer detailed information on top management. Mention the key members’ educational background, work experience, projects they have handled in the past, and the profit the company generated from those projects.
4. Longer Repayment Tenure
Repayment terms are directly related to your wallet. If you choose the short tenure, the EMI will be higher. If you do not have a substantial income stream, short terms may result in rejection.
However, longer tenure has downsides as well. Let’s understand how.
Let’s first look at the table to understand better.
| Parameters | Repayment Tenure | |||
| 1 Year | 2 Years | 3 Years | 4 Years | |
| Loan Amount | Rs 15,00,000 | Rs 15,00,000 | Rs 15,00,000 | Rs 15,00,000 |
| Interest Rate | 13% | 13% | 13% | 13% |
| EMI | Rs 1,33,976 | Rs 71,313 | Rs 50,541 | Rs 40,241 |
| Interest Payable | 1,07,711 | Rs 2,11,506 | Rs 3,19,473 | Rs 4,31,580 |
| Total Payable | 16,07,711 | Rs 17,11,506 | Rs 18,19,473 | Rs 19,31,580 |
You can observe that when you opt for a longer tenure, you might receive approval but end up paying higher interest. It is best to use an unsecured business loan calculator to keep a balance between tenure and EMI.
Guide to Obtaining Unsecured Business Loan
To get a business loan without collateral, follow these steps —
- Step 1: Browse your lender’s website and navigate to the ‘Business Loan’ section.
- Step 2: Login by entering your credentials for existing customers. Register using your mobile number and OTP if you are a new customer.
- Step 3: Click on ‘Apply Now’ and fill out the application form with the necessary details. Ensure that all mandatory fields are properly filled.
- Step 4: Upload the relevant documents according to the loan type. These may include your business’s financial statements, bank statements, identity proof, and address proof.
- Step 5: Carefully review the application form for errors or missing information. Once verified, submit the form.
- Step 6: After submission, the lender will review the application. The approval process is quick, and you will be informed of its status.
- Step 7: Upon approval, the funding amount will be disbursed to your bank account. You can now use the funds for your business needs.
Conclusion
Securing a business loan without collateral is achievable by focusing on key areas. First, improve your credit score by ensuring timely payments and correcting any report errors. Next, lower your debt-to-revenue ratio by reducing existing debts. Additionally, prepare a comprehensive business plan to showcase your business’s potential and management team. Finally, consider longer repayment tenures for more manageable EMIs, but balance this with the overall interest cost.
