How to Get Small Business Loans without Collateral

Starting or running a small business in India offers many growth opportunities and enables you to be your own boss. As exciting as it is to turn your passion into a profitable business, you will often face a cash crunch. This is where a small business loan without collateral proves to be useful.

According to a Reserve Bank of India research, 43% of Indian business owners cite friends and family as their main source of financing. This is because lenders ask business owners to provide collateral, which small businesses don’t have as they are just starting. You don’t own property, machinery, equipment or excess inventory.

Besides easy accessibility, the main benefit of a business loan without security is the peace of mind and access to funding it offers. Know how to get business loan without security and the way it benefits you.

What is a Collateral-Free Business Loan?

When a bank approves a loan, it seeks something of value for security in case the borrower fails to repay the loan. This something of value is what collateral is, which can be the property like an office or building you own, assets like vehicles or equipment, inventory or accounts receivable and more.

A collateral-free business loan, also known as an unsecured business loan, is a type of financing where the bank, NBFC or lender doesn’t ask you to pledge any asset. Even if you don’t own a property or equipment, the lender approves a loan if you meet the set eligibility criteria.

How does Unsecured Business Loan Work?

In secured business loans, the collateral you provide, among many other factors, makes you eligible for a small business loan. In small or MSME loan without collateral, on the other hand, lenders assess your application based on your creditworthiness, business history and financial performance. The lenders also assess your loan application based on the following factors:

• Your business performance
• Financials
• Monthly turnover
• Credit history or CIBIL score
• Vintage (how long your business has been running)

Unlike secured business loans or equity financing, unsecured business loans don’t put your assets at risk and reduce your ownership. This is why these are popular among new business owners. NBFCs, fintech platforms including Flexiloans, and even banks now offer an MSME loan without collateral through streamlined digital processes.

Who Can Apply for a Business Loan Without Collateral?

These loans are popular among MSMEs, first-time borrowers, women entrepreneurs, startups, homepreneurs, and D2C brands who do not have physical assets but run cash-positive operations. These loans are ideal for working capital needs, expansion, seasonal stocking, hiring staff and paying salaries.

Who can Get MSME Loan without Collateral?

Now the question arises, ‘Who can get MSME loan without collateral?’ If you are a business from any one of the mentioned categories, you can apply for a small business loan in India:

• Retail Businesses: Kirana stores, organic food stores, mini-marts, mobile and electronics shops, electrical store, clothing and garment stores
• Service-Based Businesses: Salons, beauty parlours, repair shops (mobile, electrical, automotive), coaching centres, private tutors, interior decorators and event planners
• Traders & Wholesalers: Stationery suppliers, FMCG distributors, industrial goods wholesalers, pharma and medical product traders
• Food & Beverage Businesses: Restaurants, cafes, cloud kitchens, catering services and food delivery startups
• Manufacturing & Production Units: Textile and garment manufacturers, furniture workshops, handicraft units, packaged food producers
• Transport & Logistics Providers: Courier and delivery services, vehicle fleet operators, packers and movers
• E-commerce Sellers & D2C Brands: Amazon, Flipkart, Meesho, and Shopify sellers, direct-to-consumer brands, online businesses
• Professionals & Freelancers: Chartered Accountants (CAs), architects, designers, IT consultants, developers and legal practitioners
• Healthcare Providers: Clinics, diagnostic labs, pathology labs, local pharmacies, ayurvedic and wellness centres

Eligibility for Unsecured Business Loan

If you’re running a small or medium enterprise, chances are you’re eligible, but there are a few key criteria for unsecured loans you’ll need to meet:

• Business Vintage: Your business must be in operation for at least 12 months.
• Monthly Turnover: The monthly turnover of your business should be over ₹1.5-2 lakhs.
• Age: You, as a business owner, must be between 21 and 65 years old.
• Business type: Sole proprietors, partnerships, private limited companies, and LLPs can apply.
• Credit Score: You and your business credit score must be over 700.

Lenders prefer applicants with clean financial records, even if they don’t have collateral. If your business earns steadily and your documents are in order, lenders are more likely to approve your loan.

Benefits of Collateral-Free Business Loans

From flexible use of funds to quick access, here are the primary benefits of unsecured loans you must:

• Needs No Collateral: Small business owners sometimes don’t have assets to pledge. One of the key advantages of MSME loans without security is that it removes the need to offer collateral, simplifying access to financing.
• Faster Processing: As there is no need for you to submit collateral, there is less paperwork for lenders to process, which also eliminates the need to evaluate properties. Lenders usually approve small business loans within 2–3 working days.
• Minimal Paperwork: You only need basic documents like Aadhaar, PAN, and bank statements. This decreases time and increases accessibility to finance.
• Risk-free for You: As you are not pledging your property or assets as collateral, there’s no fear of losing your property or assets if something goes wrong. Your assets are safe.
• Flexible Use of Fund: You can use the funds for working capital, hiring, expansion, or inventory. You’ve no restrictions on the utilisation of the funds.

Types of Unsecured Business Loans Available

Depending on your business requirements, you can apply for different types of business loans without collateral. Whether you need funds to cover daily expenses or pay salaries, here are the types of unsecured business loans you can apply for:

1. Working Capital Loan: A working capital loan without collateral helps you cover daily operational expenses like salaries, rent, utilities, and short-term cash gaps.
2. Line of Credit: It is a revolving flexible credit line that you can use whenever you need to and repay it when you can while paying interest only on the amount used.
3. Term Loans: It is a type of business loan in which a lender lends a certain amount of money for a predetermined duration of time that the borrower repays in regular payments.
4. Merchant Cash Advance: It is a short-term financing in which you get a one-time payment and repay the loan with a portion of future revenue/sales via credit and debit cards.
5. 5. Invoice Financing: Invoice financing helps B2B businesses unlock cash tied up in pending invoices.

All these types of business loans offer their own features and benefits. The key is choosing based on your cash flow, repayment ability, and business model type, not just what’s trending.

Step-by-Step Guide for How to Apply for an Unsecured Business Loan

Besides all the benefits, the online collateral-free business loan application process makes it easy for you to apply. It eliminates the need to visit banks and stand in long queues. Here is how to apply for MSME loan:

1. Choose the Right Lender: You must choose the right bank, NBFC or lender that offers favourable terms and an easy application process.
2. Check Eligibility: Visit the official website or platform of the lender and ensure you meet the eligibility criteria.
3. Fill Out the Online Application: Enter some basic info, such as your business name, business type, turnover, how much you need, PAN, GST number, and contact details. 
4. Upload Documents: Now, upload your KYC documents, business registration proof, bank statements, and GST returns.
5. Get Offer & Accept: If eligible, the lender will send you a business loan offer, including the interest rate, EMIs, and tenure. Review the terms and accept them digitally.
6. Get Funds: After approval, lenders transfer the loan amount directly to your bank account, sometimes in just 24 to 72 hours.

Many platforms also assign a relationship manager to guide you through the process and answer your questions. So, if you’re wondering how to apply for an MSME loan, know that it’s never been easier, especially with digital lenders leading the way.

Documents Required for MSME Loan without Collateral

As compared to secured loans, you have to submit a few documents for unsecured business loans. Here is a list of all the necessary documents for MSME loan you must submit during application process:

• PAN card (yours or your business’s)
• Aadhaar card
• Business registration proof like your Udyam or GST certificate
• Bank statements (last 6 to 12 months)
• GST returns (especially if you’re GST-registered)
• ITR (only if you’re going for a larger loan amount)

Common Mistakes to Avoid

36% of business loans in India face rejection due to poor credit scores. It is one of the many reasons why MSME loans get rejected in India, making it important for you to ensure you avoid the most common mistakes. Here is how you can improve chances of loan approval:

• Incomplete Documents: Lenders flag and reject applications with missing GST returns, outdated bank statements or poor documentation. While applying for an unsecured business loan, ensure all documents are latest and free of any errors.
• Low Credit Score: A good credit score gives a lender insight into a borrower’s repayment commitment and spending behaviour. If your CIBIL score is less than 700, improve it by paying credit card bills and loan EMI on time.
• Over-borrowing: Ensure that you know exactly how much amount you need to cover business needs. You should avoid applying for amounts higher or lower than necessary. If you already have multiple loans, you might come off as financially stretched.

Conclusion

There will always be a need for financing when running a business, but it shouldn’t hold you back from expanding. A small business loan without collateral offers you financing that you can use flexibly for many business operations. From expanding your team to launching a new product line, unsecured loans offer the freedom you need to grow smartly without taking on unnecessary risks.

At FlexiLoans, we offer unsecured business loans with quick approvals and digital processes. Whether you run a grocery store or a restaurant, you can get a fast collateral-free loan and use it flexibly. Your growth story doesn’t need to wait for property papers. Get in contact with our experts now.

FAQ about Unsecured Business Loan