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:

  1. time-consuming processes
  2. 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

Categories Business Loan Overdraft
DefinitionFixed 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of time, against collateral (if secured loan) and to be repaid with interest rate in the form of EMIsAmount can be withdrawn even if the bank account balance of the borrower is zero or below
Loan TypeBorrowed CapitalCredit Line
Interest Rate ChargedOn sanctioned loan amountOn overdrawn amount
Availed AsLong-term LoanShort-term funds
Repayment TypeIn the form of EMIsFrom bank deposits
Interest Rate CalculationMonthly BasisDaily Basis
Loan Amount or Borrowed FundsDepends 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 holderYes, the borrower has to be an account holder to avail overdraft facility

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