In India, getting timely and the right amount of credit by small and medium enterprises is not just a necessity but also a problem. Banks are hesitant to give out loans due to the risk factor associated with it. Financial institutions,therefore,require loan applicants to submit a collateral. Ability to provide collateral is a huge factor in taking out a loan for businesses. But this is a major problem for small and medium (SME) businesses. But there is hope on the horizon: collateral-free loans. Loans are needed to fund all working capital needs, expand the business,and generally grow the business. Even though the Government of India has many schemes in place to help SME business but in focus today are the fintech companies that are providing collateral-free loans.
How are companies being able to provide collateral-free SME loans?
All major fintech companies today have launched some form of collateral-freebusiness loans designed specifically for SME businesses. But amidst the glitter, it is worth wondering how are these companies able to provide such loans. The companies usually make the loan approval process longer and stricter. They are finding more ways of ensuring the loan applicants pay back the loan like a guarantor. Having a guarantor is often a requirement for business loans. Another way is by looking at the loan applicant’s bills receivables and credit card receivables and giving out a loan on them.
Benefits of collateral-free SME loans
Besides the obvious advantage of not having to provide any collateral, there are many other benefits. Let’s read some advantages of why taking out a collateral-free SME loan will help.
- No collateral required
- Attractive and competitive rate of interest
- Flexible repayment tenures ranging up to 5 years
- No track record needed but if the track record is there it will be an advantage
- Moratorium period on repayment
- Perfect for product development funding.
How to get the best collateral-free loan for SME?
The first step to taking out a loan for any business is to determine how much is needed. There are many types of collateral loans in the market. If one has the groundwork of their business right,then the application process will be smoother. There are some factors that one can ensure to have to ensure that they get the best business loan.
- Explore all available options. There are some fintech companies that operate online and whose application process is also online. Look at reviews.
- If funds are required for short term and there is positive cash flow, then one can look into term finance loans. These loans are disbursed within days once the loan is approved.
- There are loan specific to the business type available. Many fintech companies have tied up with online seller platforms to provide the best finance. Online sellers have very different needs for MSME loans and as such,taking a look into loans designed for specific businesses could also help.
- Many companies provide business loans by looking at the bill’s receivables. Any applicant must look into the option of liquidating the accounts receivables. Loan amounts of Rs.1 lakh to up to Rs.1 Crore can be availed.
- Some companies receive their payments through credit cards at the point of sale machines. For such companies, financial institutions have come up with a product called Merchant Cash Advance. It is not technically a business loan but how it works is it provides loan amounts to finance the borrower’s monthly card settlement.
Eligibility Criteria
- Private limited companies with SME/SSI registration can apply for collateral-free business loans.
- The business has to be in operation for at least three years. This limit will be different from company to company.
- Businesses also need to have a certain turnover to be eligible. This is a requirement to judge if the business will be able to make the repayments.
- Some companies also have a requirement of their loan applicants to have a high CIBIL score. A CIBIL score of at least 650 and higher is generally lookedat.
- Some loan providers also look at the investors of the company. Preference for angel investors or VC investor companies is
Charges and interest rates
While all interest rates and all other charges will differ from company to company, there is a range that any applicant can expect. It is important to keep in mind that interest rates are extremely competitive and will vary vastly across companies. Another important factor is that the charges will also be different.
| Interest rate | 16% to 22% |
| Other charges | 1% to 2% |
| Tenure | 3 years and above |
| Approval time | 3 days and above |
Being an SME get anMSME loan approved quickly and get the amount required. With the requirements list high, the best option for a collateral-free loan is Fintech. The loan options are high,and interest rates are highly competitive. Repayment terms are also comparatively easy. There are several players in the industry,and there are severaloptions to choosefrom.
