Unsecured business loans for SME’s- Process and eligibility

Unsecured business loans for SME’s- Process and eligibility

It is quite common for SMEs to have a situation of the expenses in excess of the earnings, especially in the initial years. This is because the SME may have to price their products or services low enough to attract potential buyers. Further temporarily stalling operations is not prudent as operating below capacity could hit profit margins.

This is because, while revenues will fall, the fixed overhead costs would diminish the profitability.  The fixed overheads include amortization, depreciation of assets, insurance premiums, property rent, taxes, and utility bills.

At the same time, the cost of purchase of raw materials and labor is priced at the prevailing market rates. However, a cash shortage, in the long run, is not sustainable and can result in a liquidity crisis. The positive cash flow is a strong indicator of the financial health of the small business. Hence availing an SME business loan is the ideal way out.

An SME that plans to seize new business opportunities, and grow its business, continuous expansion of manufacturing operations, should opt for an unsecured small business loan.

An unsecured SME loan does not require the borrowing entity to pledge any valuable asset as collateral. With a secure digital process in place by fintech lenders, it is also easy to request for this funding. The entire loan process is carried out online- starting from application, processing to final approval, without the need to physically visit the lender premises.

FinTech lenders often are non-banking finance companies (NBFCs) that leverage cutting edge technologies to receive loan applications and disburse loan amounts in minimum turnaround time.

The SMEs that cannot afford to borrow from established banks due to high collateral requirements and other eligibility constraints have found a simple alternative to finance their business needs by way of unsecured small business loan from fintech players.

The business loans are sanctioned to all kinds of business operating structures-sole proprietary concern, partnership firm, company etc.

The process to obtain an SME business loan is as follows:

A loan applicant can apply for a business loan via the online portal of the fintech lender, by filling out a form requiring details of business constitution, turnover, monthly obligation payment capability.

To substantiate their credentials, the borrowers also need to upload the digital copies of ID proofs, PAN cards and the documents validating their business earnings. Such documents may be a balance sheet, recent profit and loss statement, the copies of processed income tax and GST returns and the documents substantiating the ownership and operating structure of the business.

Post the application submission, the FinTech sends its decision on the MSME/SME loan applied for. In case the eligibility criteria are met and all the relevant documents have been uploaded in the system by the loan applicant, approval is granted. In case of an approval, the approved loan amount is transferred to the bank account of the borrower within 3-5 business days. The final loan agreement is sent to the registered email of the borrower and can be signed digitally.

Broadly the eligibility criteria are as follows:

  • Age Limit of the applicant should be range between a minimum of 21 years & maximum of 65 years
  • Business should be profit making at least for the past 2 years
  • Turnover: Rs. 40 lakhs turnover should have been achieved as validated by GST returns
  • Co-applicants: This is optional to the applicant and not mandatory in case of a business loan
  • Submission of IT filings
  • Business should have completed an operating vintage of at least 3 years. However, in the case of 2 years of operations, the loan may be sanctioned if audited financial results of the past 2 years are submitted.