What are the benefits of unsecured loans and how can it help SMEs?

There are approximately 6.3 crore MSMEs in India and the sector contributes about 29% towards the GDP. But most SMEs have a hard time securing finance for their business owing to a lack of assets that could be pledged as collaterals. However, this issue could be effectively addressed by borrowing easy, collateral-free loans termed as unsecured business loans.

Unsecured business loans are quite popular in a country like India where the MSME sector contributes significantly to the national economy. According to a recent report, the number of new sanctioned loan accounts surged between FY18 and FY20 and unsecured loans witnessed a CAGR of 49% in the said period. Though the pandemic threw curveballs, it was observed that the Indian credit ecosystem remained resilient with the unsecured loan market witnessing a faster year-on-year growth rate in comparison to secured loans in Feb '2021.

To further understand what makes unsecured loans a popular financing option, let’s have a look at its key benefits and how it can address the financing needs of SMEs.

Requires no collateral

Unsecured loans don’t require the borrower to pledge any collateral as a security to the lending institution. Usually, lenders ask the borrower to pledge an asset as security before they can approve the loan application. But this isn’t always a feasible option for SMEs. In the case of unsecured loans, the borrower need not worry about loss of assets if they delay or default on repayment. The risk of losing assets is eliminated when one opts for unsecured loans. This is extremely beneficial for SME owners with financial constraints who can’t afford to offer expensive assets as security.

Less stringent eligibility criteria

The eligibility criteria for unsecured loans is comparatively less stringent than other types of loans. As long as you have a good credit history and a stable stream of income, getting unsecured loans wouldn’t be a hassle. You will be required to provide supporting documents that prove your eligibility and the loan would be processed. There are also lenders that approve loans by considering the profitability of the business and not the credit score. That means businesses with average credit profiles too stand a chance to get unsecured loans from digital lenders.

Quick approval of loans

The documentation is very minimal for unsecured loans and there is no time-consuming paperwork involved. All the documents can be submitted online and the loan is processed within a very short period of time. The application and approval process is simple and convenient. Consequently, loans are approved and disbursed quite quickly. Quick disbursal of funds is a key advantage offered by unsecured loans making it a handy financing option for SMEs in times of emergency. With the industry-wide adoption of technology, the loan procedure has become completely paperless facilitating swift turnaround time on unsecured loan applications.

Flexible repayment options

Most lenders of unsecured loans offer flexible repayment options. SMEs may find it difficult to keep up with the early monthly repayment due dates applicable for most secured loans for various reasons like erratic customer payment schedules or outstanding bills. Unsecured loans offer some amount of flexibility in terms of repayment making it ideal for SMEs that can’t function according to the stringent repayment time frame imposed on them.

Multi-purpose loans

Unsecured loans can be used for any purpose. Borrowers aren’t required to submit detailed plans that explain how the funds will be used. SMEs can use it for expansion, to meet operational expenses, hire new staff or any other business activities without having to bother about preparing extensive plans in advance. The borrower alone decides where and how the funds are allocated and lenders won’t usually ask too many questions about it either.

Wrapping Up

Despite the fact that new sourcing of loans was hit by the pandemic, the unsecured loan market witnessed substantial growth. With all the benefits of unsecured loans discussed here, it shouldn’t surprise anyone that these products are gaining immense popularity with up and coming Indian businesses. Unsecured loans offer business friendly terms and conditions, enabling SMEs to make the most of growth opportunities that come their way. So as India walks on a steady path to post pandemic recovery, and with a plethora of government initiatives towards strengthening the MSME sector, now is the time for SMEs to propel their business with these versatile, hassle-free loans!

Alok Nag, Founder A&H Capital