How to Attain Collateral Free Loans for Your New Business?
A steady cash flow stand as the stepping stone behind the success of any established business. However, with newbie entrepreneurs dwelling in limited assets, opting for a secured doesn’t come under the preferable list of financing options. Hence, they should aim for a collateral free business loan from a bank or an NBFC.
As the name suggests, collateral free loans are unsecured and don’t require the applicant to hypothecate or mortgage an asset.
However, when building a new business, owners may need to address various aspects for availing such a loan. For instance, they will have to furnish a sound business pitch to the lender. This pitch can include the business model, estimated revenue and growth, estimated sales, and expected profit.
Ensuring a strong business pitch will help a business owner to convince trustworthy lenders like Bajaj Finserv for sanctioning a business loan.
In addition to a pitch, the applicant also needs to hold the following parameters:
A good credit score and credit history
Banks and NBFCs, just like Bajaj Finserv, require an applicant to have a credit score of 750 or above to avail a loan without collateral security. Not only that, but an applicant also needs to have a good credit history.
The credit history is reflected in the credit report from various sources like credit card companies, banks, government, and other financial institutions.
The chances of getting a collateral free business loan will be higher if an applicant has maintained a worthwhile credit report throughout and this depends on the following factors:
If an applicant has availed a loan or product financing, then he/she should ensure regular payment of EMIs without fail. Repaying all EMIs within the due date will put a positive impact on the credit score and report.
On the other hand, failure to pay single EMI within the due date will lower an individual’s credit score and invariably hamper his/her credit report.
Having a mix of secure and unsecured loans will exert a positive impact on the credit score. Not only that, but an individual also needs to handle all of the credit responsibly to make the credit score healthy.
Limited credit utilisation
Every credit card holder is assigned a credit limit which the card owner must prohibit from crossing under any condition. Spending more than this threshold will label an individual as credit hungry which will reflect negatively in his credit report.
Note: Experts recommend keeping the credit utilization within 30 to 40% of the credit limit.
Business’ tax liability
The business’ tax liability is another aspect that banks and NBFCs check before sanctioning a collateral free loan. Generally, financial institutions require an owner to file income tax returns for at least the previous 1 year.
IT returns ensure that a business has maintained ethical standards and has the credibility as a trustworthy enterprise in the market.
A collateral free business loan is sanctioned to businesses that have a vintage of at least 3 years. Not only does such a vintage ensure that a business has sound stability, but also vouches for the experience of its owner in the field.
Further, it acts as a proxy for the lender in gaining trust on the business with their collateral free loan.
Banks and NBFCs require an owner to audit his/her business turnovers for at least the previous year by a CA. Audited turnovers include the revenues, expenses, and profit of a business.
The amount of loan that a lender will sanction may depend on the turnover reports.
Proof of business
Self-employed individuals will have to present documents related to business proof for availing a business loan without security.
These can include:
- Trade License
- GST registration
- Certificate of Incorporation
- Sales tax certificate
- Memorandum & Articles of Association
- Partnership Deed
- Sole Proprietorship Declaration
In addition to the above, business owners may also need to furnish other documents related to the business.
Not only will an owner have to maintain the above mentioned documents for availing a collateral free business loan, but also need to be within the age bracket of 22 to 55 years. They also need to provide KYC documents, bank statements, and other relevant financial documents, if any.