Home / Finance / Title: Are unsecured business loans safe for your small business?

Title: Are unsecured business loans safe for your small business?

Micro, Small, and Medium Enterprises (MSME) and its subset Small and Medium Enterprises (SME) are an important part of our country’s economy, and the administration has designated a separate ministry for the welfare of these enterprises.

Image result for business loans

However, as recently as 2015, the Reserve Bank of India (RBI) noted that this sector is significantly undercapitalised and has traditionally struggled to raise the required finance. This is in spite of the fact that the lending propensity of the organised financial sector towards this customer segment has increased in the recent past. Some of these business loans have been against collateral, however, and hence they don’t qualify as unsecured MSME loans.

Given the size of operations of an MSME/SME, it is obvious that an unsecured business loan can serve as the trigger that takes the scale of business to the next level. The financial sector seems to have taken note of this requirement of late, and has therefore opened up the doors for MSME and SME loan schemes that don’t carry the prerequisite of collateral security.

Though it is convenient for these enterprises to get a loan, how safe it is to increase your liability with these cash inflows? Due to the lack of complexity, you may prefer to opt for an SME loan for your business. However, if the loan is not complemented by a corresponding increase in growth and revenue, the financial position of your enterprise may go haywire with loans and expenses not being equated by assets, profit, and income.

Ensuring parity between top line and bottom line will largely depend on the financial management skills and business acumen of the MSME entrepreneur. Nevertheless, there are at least two important safety features that tilt the scale in favour of unsecured business loans.

Firstly, you will be avoiding the unorganised finance sector, which will save a decent amount of expenditure on interest and do away with uncertainty. Unorganised money lenders charge exorbitant interest rates and often insist on attaching fixed assets as collateral. Unsecured business loans come with a low rate of interest compared to the unorganised sector, although it is often higher than other organised sector loans.

Secondly, no collateral is required to obtain an unsecured business loan, because of which our business assets are under no immediate financial liability. You don’t need to spend time arranging and deciding which asset to attach for security. This saves a lot of loan processing time, but more importantly, the business (or any specific asset) is under no immediate threat in the event of a delay.

However, taking an unsecured loan for your small business can be a tricky proposition, particularly if you are not careful. One major concern is that it creates a personal liability for the borrower. Once you take an unsecured business loan for your small business and fail to repay it, the lender is entitled to take legal action.

Another apparent problem is the rate of interest on unsecured loans. The rate of interest often depends on the borrower’s credit score and can be quite steep if one’s credit score is not very good. Besides, the rate of interest with MSME/SME loans is generally higher than other loans such as vehicle loan, home loan etc. So by taking this loan you may end up paying a lot of interest and upset your cash flow performance.

However, Tata Capital ensures – well in advance – that the burden of interest expense and personal liability is something the borrower is able to carry throughout the tenure of the loan. It encourages you to establish beforehand that you have a profitable business that is both stable and growing. Tata Capital also makes sure that the borrower has the capacity to repay the loan, thus avoiding any future crisis situations in the borrower’s business.

Additionally, by borrowing from within the safety net of the organised financial sector, one can bring in a lot of internal discipline in the business. A borrower who relies on Tata Capital ends up monitoring their business more rigorously, whether it’s filing income tax returns, ensuring commercial viability and growth of the business, or maintaining repayment capacity.

Hence, it can be concluded that an unsecured loan taken with a well-planned utilisation strategy – and after a meticulous pre-approval procedure – is a safe proposition that can be of great help to small businesses.

 

About Rohit Shetty

Check Also

The Benefits Of Real-Time Performance Monitoring

Real-time performance monitoring can be utilized in a number of different ways. You will be …

Leave a Reply

Your email address will not be published. Required fields are marked *