Why pay higher interest-rate for unsecured business loans?

Financial Support
31 Mar 2018

Most of the SMEs in India raise working capital for their businesses with either secured business loans or unsecured business loans. Secured business loans do attract most SMEs, as they offer lower interest rates when compared with unsecured business loans. But at the same time, secured business loans work on the model of keeping collateral by NBFC/Banks. Unsecured business loans, on the other hand do not need any collateral from the borrower (SME); and it is for this very reason that there is a slightly higher interest rate that the NBFC’s charge the SMEs.

Though the higher interest rates charged for unsecured business loans may sound like a big dampener to the SMEs, it actually makes a lot of sense for short term working capital requirements. Moreover, a lot of SMEs may not have the kind of assets that they can keep as collateral, to be able to get the size of loan amount that they actually need as working capital for their business. Let’s try and understand why an unsecured business loan is any day a better choice for a SME in spite of slightly higher rates of interest than the secured business loans.

  • Quick Response on loan approvals

Unsecured business loans open up wide opportunities for New SMEs with limited or no collateral, due to quick turnarounds. Compare it with secured business loans, where the entire process requires collateral, and a lot of paperwork to finally reach the approval stage. On the other hand, unsecured business loans require much lesser paperwork apart from having a faster turnaround time to get the loan approved. Thus, unsecured business loans allow younger SMEs to run smooth daily operations by having the comfort of working capital (in form of unsecured business loan) parked at their disposal at all times and hence focusing on growing their business exponentially. Unsecured business loans are typically aimed at meeting the short-term working capital needs of growing SMEs. Therefore, new SMEs with limited or no collaterals can get quick access to working capital which is otherwise quite difficult.

  • Reduced interest payouts

Unsecured business loans help SMEs save on interest payouts despite charging a higher interest rate.

While SMEs pay higher interest rate ~ 1.4 – 1.6% per month to the NBFCs; but they can restrict their interest payout to only the used amount and only that period of time.

This helps in effective savings on interest payouts to the lender/NBFCs by the SMEs. When you compare this with the secured business loans, where SMEs typically have to pay the interest on the entire loan amount, irrespective of the usage, that clearly is attracting overall higher interest payouts.

Another advantage of unsecured business loans is that, they do not levy any foreclosure or penalty charges to the SMEs. Hence SMEs can pay back a partial or the entire amount as soon as they have the cash available, helping them save on the interest payouts.

  • Collateral-Free

The slightly higher interest rate that’s charged for unsecured business loans is also because of the fact that they do not require any collaterals from the SME across, for the loan approval. Thus, emerging SMEs with limited or no collaterals can benefit from unsecured business loans. As we know by now, secured business loans need collaterals for loan application consideration and approval. That also brings us to another point and that is to understand what exacly is collateral. Collateral basically is any kind of asset owned by the SME, and can cover any type of the assets ranging from their house, plot of land, gold, factory, machinery, raw material or even the stock of finished/unfinished inventory.

  • Efficient use of Working capital | Purchase financing power

Several factors like size of the loan amount, time period for which loan is required and the purpose of taking the loan; determine the suitability of the loan applied for. Unsecured business loans allow SMEs to have ready access to working capital and further help them negotiate for better rates of raw-material with their suppliers.

Since the SME now has a strong working capital at their disposal; they are in a much better position to be able to

  • pay to their supplier with a lot shorter payment cyclehence be able to negotiate hard and get very good rates on their raw material purchasing.

The unsecured business loan is offered without looking for any collateral as guarantee which eliminates the possibility of any valuable asset being seized. If managed efficiently, unsecured business loans offer access to working capital for a long-term in comparison to secured business loans.

Working capital is essential for any company’s growth. In case of emerging SMEs, arranging it is indeed a challenge. Therefore, unsecured business loans and credit lines by NBFCs have been designed specifically to meet the short-term operational requirements of SMEs and help them grow faster without worrying about collateral. In the last couple of years, a lot of new Fintech startups have also been set up with the same goal – to offer unsecured business loans to such SMEs.

At Oxyzo, we specifically help SMEs operating in the manufacturing, infrastructure and allied spaces to grow their business by offering collateral-free credit lines of up to INR 2 Cr. Even though unsecured business loans charge a higher interest rate, it is imperative for SMEs to think of collateral-free unsecured business loans as a solution for their short-term operational requirements, and get quick access to working capital for better growth prospects. This way, new SMEs can leverage their growth opportunities using unsecured business loans rather than compromising on their business expansion altogether.

From the business growth standpoint, having a handsome amount of working capital at your easy disposal is the most critical thing for SMEs and entrepreneurs who are starting fresh, with big dreams but not so big pockets.

Submit your credit application today and enjoy better growth opportunities.

Reach out to us at 1800-102-9586 or mail to contact@oxyzo.in

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