Understanding the Risks and Benefits of Collateral-Free Business Loans

Running or expanding a business demands financial resources. Every firm requires a swift influx of capital to recruit more employees, purchase more machinery, pay the rent, pay salaries, market, stock, or lease more office space. 

So, how do MSMEs secure fast access to funding? Most MSMEs opt for collateral-free or unsecured business loans. Is taking a collateral-free loan worth it? Let’s consider the risks and benefits.

What Is a Collateral-Free Business Loan and How Does It Work?

A collateral-free business loan is also called an unsecured business loan. It means that the lender hands funds without taking any security or asset (like vehicles, property, or gold). This type of loan is instrumental for new businesses, providing essential funds for equipment, working capital, salaries, marketing, and more.

However, lenders might need alternative guarantees for repayment. They may ask for a personal guarantee like the owner personally guarantees on paper to repay the business loan amount taken.

Risks of Collateral-free Business Loans

Outlined below are the risks of collateral-free business loans:

  • Higher Interest Rates

The associated interest rate is the biggest disadvantage of an unsecured business loan. It is usually higher than that of a secured business loan. Since the risk is higher for the lender, they charge higher rates of interest in order to cover any eventuality.

  • Need for Good Credit Score

For unsecured business loan eligibility, you need to guarantee you have a good credit score. The financial institution will be interested in your credit history and your potential to manage diverse kinds of debt as you aren’t offering any collateral. They’ll carefully examine your credit score, your regularity in paying off loan instalments and credit card bills, and so on, for the past couple of years.

  • Requirement for Specific Documentation

Even though there’s not much paperwork involved in securing a collateral-free business loan, lending institutions ask to see several documents like registration certificates, licences, lease or rent statements, bank account statements, GST returns, audited profit and loss statements and balance sheets, KYC documents, list of existing loans, PAN card, and so on.

Benefits of Collateral-free Business Loans

Below are the major advantages of securing collateral-free business loans:

  • Quick Approvals

Since there’s no asset evaluation required, unsecured loans are typically processed more swiftly, with funds disbursed within one or two days. Documentation is also less extensive compared to secured loans. The lender simply needs assurance of your business’s legitimacy. This expedites getting your business off the ground, avoiding prolonged waits and concerns over funds.

  • Build Credit History

Paying your loan on time helps build your credit history. It means that any MSME loan applications you make in the coming times will be viewed more positively, and you’ll be able to get business loans effortlessly. If you have previously availed a personal business loan without security, and have repaid it timely, or are repaying it each month, it’ll help you with the collateral-free loan as well.

  • No Collateral Requirement

Certainly, this is the most significant benefit for you. As a business owner, you don’t need to jeopardise your assets like property, gold, or vehicle to raise funds. Thus, an unsecured loan offers great advantages for small or medium-sized business owners. You can kickstart your earnings and start repaying the loan without any worries about mortgages. There’s no risk of losing your property with an unsecured business loan, and you’re free to make any enhancements or changes you feel necessary.

  • Flexible Repayment Options

Lending institutions frequently provide businesses with adaptable repayment options, permitting you to pick the most suitable one based on your needs and capabilities. This helps you to avoid fines because of delayed or missing instalment payments. You can simply type in the preferred business loan amount and repayment schedule in the unsecured business loan calculator to know the monthly installment amount.

  • Loan Amount Isn’t Linked to Any Asset Value

The loan amount isn’t tied to any asset’s value with collateral-free business loans since you’re not pledging any as collateral. You can borrow based on factors like your creditworthiness and the lender’s maximum limit. Unlike secured loans, where you may not receive the full asset value as a loan, unsecured loans offer flexibility in borrowing the needed amount for your business without asset appraisal constraints.

  • Flexible Usage

One significant benefit is the flexibility to use unsecured business loans for a wide range of purposes. These funds can be allocated to various business needs, including expansion, purchasing raw materials, covering staff salaries, and more. Financial institutions typically don’t require you to specify the reason for seeking an unsecured business loan.

  • Tax Benefits

Unsecured business loans also offer tax advantages. The interest paid towards loan repayment qualifies for a tax deduction. To avail of these benefits, ensure to include the interest payment in your expenditure records.


Collateral-free business loans are a good instant funding source for your business. They might have higher costs and need strong business finances and credit history, but they let you borrow without risking your enterprise’s assets. They also put forward simple online applications and swift funding. Just ensure you shop around and compare various offers from numerous lenders to get the best deal.

NBFCs offer loans to MSMEs without requiring collateral, providing competitive terms and conditions. NBFCs maintain flexible eligibility criteria, require minimal documentation, and ensure swift processing, making them a compelling choice for MSMEs seeking funds.