Business needs vary from business to business. However, a common thread across all business units especially startups is the need for finance. The finance may be in the form of equity from the promoter’s capital or external financing by way of startup business loans. Out of the various debt options, the unsecured business loans are most suited for a start-up. The following are the ways in which unsecured business loan, without collateral cover, may be availed for a startup business loan:
- Working capital
The working capital loan is required to meet the short-term cash shortage. This is taken to meet the daily, routine business expenditure for the conduct of business operations. The working capital loan is ideal to overcome the seasonal shortfall of cash, irregular cash flow or to cater to a sudden spurt in business. A manufacturer, service provider, retailer/wholesaler or a trader engaged in imports/exports is eligible to apply for working capital loans. Working capital loans are generally provided with a tenure ranging from 6-12 months. The interest rates charged depend on the creditworthiness of the business. Banks insist on collaterals, but new age financial companies, popularly called fintech companies, provide collateral free loans. Collateral can comprise residential, commercial, industrial property, or even shares, stock, book-debts, and gold.
Types of the working capital loan include a business line of credit, cash credit / Overdraft, Packing Credit and Post Shipment Finance. There are other modes of working capital loans, primarily for the export community, like Letter of Credit (LC). Recently the RBI has banned the Letter of Undertaking instrument.
- The line of credit: In this case, a business has a certain amount of earmarked funds that can be utilized in a revolving manner. It functions on similar lines like a credit card whereby one can utilize tranches of money from a certain limit, repay within the due date and pay interest. The interest rate on the line of credit is nominal but can increase in case of failure to pay within the stipulated time.
- Term loan
These are long term debt, where a lump sum amount is disbursed towards capital expenditure. The tenure is fixed, with either a fixed or variable interest rate. Such loans appear in books of account as long term debt.
- Equipment financing
These types of loans are extended to the manufacturing sector. Equipment are crucial for business operations and expansion of business activity. To purchase equipment, most financial institutions have specialized loan products to meet this need. The tenure is fixed.
- Invoice financing
Invoice discounting and financing is a popular method to raise capital. This is an easy way for small businesses to procure working capital. There is often a time lag between the raising of the invoice and the ultimate realization. One can approach a financial institution to provide you a loan against the invoice from reputed customers. Generally, 80% of the invoice amount is given as a loan and the remaining 15% becomes due when the invoice is fully paid by the customer. The lender will deduct nominal charges like the processing fee and interest.
- Pradhan Mantri Mudra Yojana (PMMY)
MUDRA is a scheme specifically targeted at benefitting the MSME industry in the non-farm sector. The loans under this scheme, without collateral, is available under three products – depending on the stage of growth and funding needs of the enterprise.
- Shishu generally covers loans up to Rs 50,000
- Kishore between Rs.50,000 to Rs.5,00,000
- Tarun covers loans between Rs 5,00,000 and up to Rs. 10,00,000.
- Stand Up India
This scheme is aimed at benefitting the entrepreneurs from the Scheduled Caste (SC) or Scheduled Tribe (ST) and women borrower to set up a new venture.
There are several unsecured business loans offered by fintech companies at attractive rates for start-ups. One must select one best suited to business needs.