The government of India has launched a number of schemes – the MUDRA loan scheme and the stand up India scheme – to make credit available easily to small businesses and start-ups. Likewise, the banks and non-banking financial companies (NBFCs) also allow entrepreneurs to fund their working capital needs through a variety of secured and unsecured business loan products. But a number of studies still suggest that a large percentage of entrepreneurs in India still find it difficult to avail unsecured business loans easily and timely. Entrepreneurs can not avail an unsecured business loan without meeting the specific eligibility criteria by the lending institution. They must understand How to Qualify for Unsecured Business Loans and focus on a number of factors to be eligible.
How to Qualify for Unsecured Business Loans?
Understand Why Lenders Reject Unsecured Loan Applications
The lending institutions reject collateral-free business loan applications due a number of reasons. Also, reason for rejection of unsecured business loans differ from one borrower to another. But the entrepreneurs must understand the common unsecured business loan rejection reasons. They must understand that the lending institutions do not provide unsecured credit to small businesses if the business is relatively new or it is yet to become profitable. Likewise, they reject unsecured loan applications if the business has adverse cash flow position, inadequate accounting system, or unimpressive management.
Maintain Excellent Credit Score
The entrepreneurs have option to choose from an array of collateral-free business loans. But no lending institution will provide secure or unsecured business loans to an entrepreneur with low credit score or poor credit history. The entrepreneurs must maintain an excellent credit score to increase chances of getting an unsecure business loan. Likewise, they must work on building and improving the business’s credit history to qualify for collateral-free business loans. However, the borrowers must work on maintaining a good credit score and improve credit history consistently.
Prepare an Elaborate Business Plan
Before approving an unsecured business loan, the lending institutions assess the borrower’s financial history and business plan. They even use the information collected from the business plan to determine the business’s long-term growth and profitability. Hence, no entrepreneur can qualify for unsecured business loans without preparing an elaborate business plan. The business plan must include the information required to identify the business’s long-term objective, turnover, revenue, and strategy. The entrepreneurs also need to make the business plan concrete by including financial statements and other documentation.
Keep the Cash Flow Position Positive
Often business owners need credit to meet immediate financial needs or improve cash flow position. But no entrepreneur can avail unsecured business loans without keeping the cash flow position positive. They must monitor on cash inflow and outflow consistently to avoid adverse cash flow positions. Likewise, they must project the cash flow accurately to convince the lending institutions that the business loans will be repaid timely and fully. The positive cash flow will further help the borrower to negotiate for favourable interest rates.
Opt for Technology-Driven Business Loans
Many NBFCs nowadays leverage financial technologies to make credit available to business owners based on real-time data like monthly turnover and value of unpaid invoices. The technology-driven loan products enable entrepreneurs to avail credit without using assets as collateral and meeting strict credit requirements. For instance, an entrepreneur who has installed a POS-system can avail credit through Point of sale finance based on the amount of monthly sales routed through EDC terminals. They can even avail additional credit by persuading customers to use their debit or credit cards.
Convert Current Assets into Liquid Assets
The entrepreneurs nowadays have a number of options to meet working capital needs without applying for unsecured term loans. They can always opt for the specialized products and services provided by various fintech companies to fund working capital needs by converting current assets into liquid assets. For instance, the invoice discounting services provided by various NBFCs enable entrepreneurs to avail credit easily and quickly by discounting their unpaid invoices or goods received notes. The specialized services even do not require business owners to repay the business loans through EMIs.
However, it is also important for the entrepreneurs to compare various secured loan products based on important parameters like business loan eligibility criteria, interest rate, repayment period, and foreclosure charges. Initial research will help small business owners to choose right unsecured business loan product and qualify for the loan. However, no entrepreneurs can quality for various collateral-free business loan products in a short amount of time. They must work on these factors consistently to increase chances of availing collateral-free loans.