Unsecured Business Loans:

For any business, irrespective of its size, maintaining adequate working capital is crucial. However, even the most meticulously planned financial strategy fails at times— impacting the cash flow of the business. For decades, traditional banks have been the go-to place for any financial requirements for businesses. One of the most popular types of loans opted by businesses is “Unsecured Business Loans”.

However, traditional unsecured loans are not apt for every business—especially for businesses that need quick access to working capital. Additionally, the exhaustive documentation process, high rate of interest, and time taken to get the loan approved pushed many business owners to look for alternative financing options.

Thankfully, in the last decade, several alternative lending options have emerged to help businesses with their ever-changing financial requirements. The most beneficial among these alternative lending options is “Invoice Discounting”. Before we discuss the benefits of invoice discounting, let us understand the definition and features of unsecured business loans.

What Are Unsecured Business Loans?

Unsecured business loans are also known as no-collateral loans or business loans without security. This type of loan is usually offered based on your company’s creditworthiness, the status of your business financials, and your ability to repay the debt. It can be availed when companies require immediate working capital either for growth or daily business operations during a cash crunch.

Sources of Unsecured Business Loans:

Here are some of the popular sources of business loans without security:

  • Commercial banks and NBFIs: Business owners can apply for unsecured loans at commercial banks or non-banking financial companies if they meet the loan eligibility criteria. You can also find financing in the form of pre-approved loan offers from banks with which you have established a good business relationship.
  • Peer-to-peer lending: On peer-to-peer lending platforms, investors are connected with business owners who are looking for financing. The investors will pool money together to fund small business loans that can be repaid with interest like any other loan.
  • Private lenders: Some private lenders are more fluid with the loan eligibility requirement where companies can get startup loans with a short operating history of less than 1 year. You can find private lenders online who are willing to offer unsecured business loans to applicants with bad credit. However, you may have to provide some form of security, for example, a co-guarantor who will be held liable if you default on debt repayment.
  • Invoice Discounting: In invoice discounting, a business can trade their unpaid invoices to access quick short-term funds at a discounted rate. For example, companies that want to get unsecured business loans can opt for invoice discounting wherein you can leverage outstanding invoices to secure a loan without worrying about providing collateral.

Difference Between Unsecured Business Loans and Invoice Discounting:

There are many major differences between unsecured business loans and invoice discounting. Some of them are:

  • Tenure of the loan: In bill discounting, quick short-term financial assistance is provided which is usually up to 90 days. Whereas, unsecured business loans offer longer tenures. 
  • Quick approval: While securing a traditional business loan can take days, accessing funds through invoice discounting is faster; usually within 2-3 working days. 
  • Impact on the balance sheet: KredX offers a zero-liability bill discounting service that does not impact a company’s balance sheet as it is not considered as a debt. Whereas, secured loans may impact a company’s balance sheet to a large extent.
  • Collateral security: Though both invoice discounting and unsecured business loans do not require collateral, it is simple and easy to trade your invoices to access funds as the invoice in itself acts as collateral. However, securing a business loan is a lengthy, time-consuming process though it does not require collateral. 
  • Credit rating: A business can use a bill discounting facility to improve credit rating as it is short-term financial assistance. On the other hand, unsecured business loans with longer tenures can put your credit rating at risk if payments aren’t made on time.

Invoice Discounting Eligibility Criteria:

To avail invoice discounting service through KredX, a business must meet the below eligibility criteria:

  • The credit score must be 650 or more
  • The business must be established for a minimum of 10 months
  • The business should have dealt with a minimum of 2 large corporates
  • The business must have a base turnover of at least 25 lakhs

Sign Up Now to Check your Eligibility for Bill Discounting Services

    How to Get Business Loan Without Security Through Invoice Discounting:

    With KredX, the bill discounting process is very simple. In a nutshell, a business must generate an invoice on the date of the sale and mention the credit period (bill payable date). They must then upload the invoice copy on KredX website. Investors in the KredX pool will purchase the invoice at a discounted rate. Within 24 to 72 Hrs* from the invoice value being approved, the funds will be credited in the business account. The business receives the funds without any hassle.

    Frequently Asked Questions:

    A. Discounting of a note receivable is when a company sells or pledges a note receivable of a customer to an investor or a financial institution prior to its maturity date. The investor funds a percentage value of the note and the business returns the funds along with interest within a stipulated tenure.