Ways to get an unsecured business loan for MSME

 The fintech revolution has democratised access to capital for MSMEs, allowing small businesses to scale without facing the traditional hurdles of collateral and long approval times.” – Jitan Ram Manjhi, Minister for MSMEs, India.

Having access to finance has always been a significant challenge for Micro, Small, and Medium Enterprises (MSMEs). For many MSMEs operating in our country, unsecured business loans are an ideal solution, as they do not require collateral and are faster to obtain.

But how can one secure such a loan? Let’s explore this together.

Unsecured Business Loans

Before heading forward into the various ways to secure an unsecured business loan, it’s essential to understand the meaning of it.

Unsecured business loans or collateral-free loans do not require the borrower to pledge any asset or collateral. This means that the lender trusts the borrower’s ability to repay on the basis of their business viability, cash flow, and creditworthiness. Understanding this can bring a sense of relief and empowerment to MSMEs, knowing that they can secure a loan without risking their assets.

For MSMEs, it is one of the crucial loans as many such enterprises need substantial assets to pledge. This makes unsecured loans more accessible.

  • Loan Type: No collateral required

  • Common Providers: Banks, NBFCs, Fintech Platforms

  • Risk: Higher interest rates, as no collateral is provided

  • Key Factors: Creditworthiness, cash flow, business health

How to Qualify for an Unsecured Business Loan

Most MSMEs have this question of how they can qualify for such unsecured business loans. Though the qualification criteria may vary from one lender to another, here are some of the key factors that an MSME should focus on:

a. Maintain a Strong Credit Score

It is one of the imperative aspects that every lender considers is your credit score. For businesses, especially MSMEs, it is a reflection of their financial health. Generally, a credit score of the mark of 650 and above is considered a good option for an unsecured loan. Creditworthiness, which is the measure of a borrower's ability to repay a loan, is often determined by factors such as credit score, financial history, and current financial situation.

b. Keep Your Business Financials Updated

Lenders usually assess all the financial statements, cash flow, and profitability before giving loans. Hence, MSME enterprises should keep their balance sheets, profit and loss accounts, and bank statements up to date.

c. Demonstrate Consistent Cash Flow

Your business’s ability to generate regular revenue reassures lenders of your repayment ability. Hence one needs to maintain a steady cash flow over at least 6 months to a year.

Ways to Get Unsecured Business Loans for MSMEs

Let’s discuss some of the best ways MSMEs can secure unsecured loans:

1. Traditional Banks

Traditional banks, as previously they are associated with secured loans, are currently evolving accordingly to meet the growing needs of MSMEs. Various governmental initiatives have played an evident role in encouraging these financial institutions to offer unsecured loans.

Such a shift is indicative of a broader trend towards greater accessibility and flexibility in the lending landscape for small businesses. By offering unsecured loans, traditional banks are not only supporting entrepreneurship but also showcasing their adaptability towards the changing market dynamics.

Advantages:

  • Lower interest rates as compared to any fintech or NBFCs.

  • Longer repayment tenures.

Steps:

  • Approach your bank with financial statements, business history, and tax returns.

  • Banks may also consider your relationship with them, such as how long you’ve held an account or any previous loans.

2. Government Schemes

Governments across the globe, and especially in India, have recognised the indispensable role of micro, small, and medium enterprises (MSMEs), especially when it comes to driving economic growth and helping towards job creation. Such enterprises, often family-owned or locally operated, contribute towards the country’s economy, significantly aiming towards both national and regional development.

To support the growth and evolution of MSMEs, various government-backed loan schemes have been implemented. Such initiatives offer great financial assistance to MSMEs. This step enables them to invest in new equipment, expand their operations, hire additional staff, and seize emerging market opportunities. By offering access to affordable credit, such loan schemes help MSMEs overcome various financial constraints and fulfil their business aspirations.

Popular Schemes for MSMEs:

Top Government Loan Schemes for MSMEs

Mudra Loans: These loans, part of the Pradhan Mantri Mudra Yojana (PMMY), allow micro-businesses to access unsecured loans of up to ₹10 lakh.

Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE): Provides collateral-free credit to MSMEs, ensuring that even small businesses can access financial support.

“MSMEs contribute significantly to employment and GDP. These government schemes are essential to ensuring their growth is unhindered by lack of capital.” – Arun Jaitley, Former Finance Minister of India.

3. Non-Banking Financial Companies (NBFCs)

NBFCs have emerged as one of the suitable options for businesses, particularly MSMEs, facing challenges in securing loans from traditional banks. Their streamlined processes reduced documentation requirements, and flexible terms often make them a more attractive choice.

Unlike any other traditional banks, NBFCs are not subject to the same regulatory oversight. Such a term allows them to offer more tailored solutions and potentially faster approval times. This flexibility, coupled with their ability to assess creditworthiness beyond the traditional metrics of any conventional banks. Due to this, it has made NBFCs a valuable source of funding for businesses seeking alternatives to traditional banking.

How NBFCs Work:

  • Shorter approval time, often within 24-48 hours.

  • Unsecured loans for MSMEs based on business viability and cash flow.

  • Higher rates of interest due to lack of collateral.

Steps:

  • Check NBFCs like Bajaj Finserv, Tata Capital, or L&T Financial Services.

  • Ensure you have strong business documentation and proof of income. This includes your business plan, financial statements, tax returns, and any other documents that can demonstrate your business's financial stability and ability to repay the loan.

4. Fintech Platforms

Fintech platforms are now reshaping the boundaries of MSME lending by introducing a fully digital loan application process. These innovative platforms utilise sophisticated data-driven algorithms to evaluate the financial health of the business or enterprise, market trends, and customer feedback in real time. This comprehensive assessment allows for quicker decision-making and more tailored loan offers. As a result, one can expect a more efficient and better lending experience for MSMEs.

Advantages:

  • Speedy loan processing (within hours or days).

  • No need for a long banking history or a high credit score.

  • Flexible repayment plans.

Steps:

  • Look into platforms like LendingKart, Razorpay Capital, or Indifi.

  • Submit business data, GST returns, and bank account summaries for quick approval.

Tips to Increase Your Chances of Securing an Unsecured Loan

Now that you know where to look, let us see how you can improve your chances of getting approved for an unsecured loan.

a. Improve Your Credit Score

Work on building a higher credit score. A good credit score usually indicates lower interest rates and a higher likelihood of approval.

Actionable Tip:

Regularly monitor your business’s credit score via platforms like CIBIL or Equifax. Aim for a score above 750.

b. Ensure Strong Cash Flow Management

Ensure that your business has enough cash reserves and that there is consistency in cash inflows. Lenders will definitely want to see a consistent cash flow pattern for the past 6 to 12 months.

c. Maintain Strong Business Financials

Many businesses fail to secure loans because they don’t have clear financial documentation. Keep your balance sheets, profit and loss statements, and tax filings in order.

Bottom Line

It is true that every MSMEs requires capital to grow, innovate, and compete in today's market. Unsecured business loans are a convenient option for many small enterprises looking to expand without risking their assets. With platforms like PSB59, various NBFCs, companies heading towards the mark, MSMEs have more opportunities than ever to access much-needed financing.

By focusing on improving your credit score, maintaining solid financial stability, and understanding which platforms work best for your business, you can increase your chances of securing the funds you require to propel your business ahead.

Additional Read:

MSME Champions Portal: Comprehensive Support for Indian MSMEs

MSME Loans for Small Businesses

MSME registration process in india

Understanding CGTMSE: Small Business Financing Made Easy

What are loans for bad credit?

Secured Loan vs. Unsecured Loan
Location: India

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