An unsecured business loan may be used for various business purposes like business expansion, to meet working capital needs, buying land or property, purchasing plant or machinery, hiring staff, training employees, purchasing raw materials, enhancing stocks and inventory, etc.
It’s a fast and easy source of raising business finance and is a great alternative to traditional business loans/secured loans which are associated with:
- time-consuming processes
- collateral or security from the borrower
Most of the times, small business owners do not have assets to pledge as collateral, and such situations call for unsecured business loans or collateral-free loans. A business owner can procure funds without having to worry about pledging any asset.
Unsecured loans help businesses finance their growth over time. Such financing is especially valuable to small businesses as it can cater to sudden needs of the business without a long-term commitment to the Lender.
Business Loans vs Overdraft
|Definition||Fixed loan amount borrowed for a definite period of time, against collateral (if secured loan) and to be repaid with interest rate in the form of EMIs||Amount can be withdrawn even if the bank account balance of the borrower is zero or below|
|Loan Type||Borrowed Capital||Credit Line|
|Interest Rate Charged||On sanctioned loan amount||On overdrawn amount|
|Availed As||Long-term Loan||Short-term funds|
|Repayment Type||In the form of EMIs||From bank deposits|
|Interest Rate Calculation||Monthly Basis||Daily Basis|
|Loan Amount or Borrowed Funds||Depends on business requirements, applicant’s profile, credit score, etc.||Depends on the amount of money in current account, relationship with the bank|
|Does the applicant need to be an account holder of the bank?||No, the applicant is not required to be the account holder||Yes, the borrower has to be an account holder to avail overdraft facility|