April 14, 2024

Business Bib

Business & Finance Blog

How long can you get an unsecured loan for your business?

3 min read

Many small business units face challenges in obtaining fast unsecured business loans at competitive interest rates to meet timely business commitments. Either the interest rates are exorbitant, or the payment structure is unfeasible with high prepayment penalties or the tenure is inadequate. This lack of access to finance has changed in recent times with the advent of the fintech players. Fintech players extend start up business loans with tenures varying from 6months to 36 months. Broadly, a lower tenure lowers the lending risk of the lender. In the case of a business unit with strong financial credentials, the lender would be willing to offer a relaxed payment tenure as the lending risk is considerably reduced.

While NBFCs offer unsecured business loans for both short term working capital and long tenure term loans, there are some internal and external factors which influence the loan tenure, which is as follows:

External factors that determine business loan interest rates:

  1. Money supply in the economy: When the monetary policy is relaxed, the liquidity grows and results in surplus money supply situation. This causes a favorable extension of the tenure. Similarly, in the case of monetary policy tightening, the tenure will decrease. This is also guided by RBI’s repo and reverse repo rates.
  2. Demand and Supply of Loan: The fundamental economic forces of demand and supply play a major role in determining the loan tenure on business loans. If there is extensive demand for loans, the lenders would extend restrictive clauses as regards tenure.
  3. Loan type:  Generally, the tenure is shorter for unsecured loans, without collateral, offered by fintech companies. This is done to mitigate their lending risk. However, in case of the strong internal financial strength of the company, one can obtain a fast unsecured business loan, without collateral for a favorable tenure, whereby the cash flows of the business are synchronized with the tenure of repayment. In case of a long tenure loan, it is convenient to sync the EMI repayment with the cash flows.

Internal factors that determine business loan tenure:

  1. Credit Score: The credit score of the business is the most critical aspect when it comes to evaluation of eligibility of a business loan. There is a high probability of the business loan being rejected in case of a poor credit score below 700. Improving the credit score by promptly clearing outstanding debt and timing the cash flows with the interest liability can help obtain favorable terms with flexible tenure options.
  2. Period of operations: The operating period of the business also decides the loan tenure. In case of a business enterprise with a track record of stable operations over a long period of time, the lenders would factor in the positives and enhance the loan period. Extension of the loan period in case of a capex loan is convenient for the borrower as it can be deducted as a business expenditure in the long run against the revenues generated from the fixed asset.
  3. Nature of business: Certain industries with complex valuation model like the diamond industry, export focused business, seasonal business-like commodities, and real estate industry have difficulty obtaining institutional finance under favorable terms. Such businesses are usually classified by a government and financial institutions as highly volatile and risky. Obtaining a business loan for such a venture entails restrictive conditions and inconvenient tenures.
  4. Viable Business Plan: A lender may require a business plan prior to loan approval. In case of absence of such forecasts and forward-looking documents, the lender may compensate for the risk by allowing a strict payment tenure. It is therefore prudent to prepare a feasible business plan, before a loan application. In case of a working capital loan, it is best to obtain a tenure of 6-12 months as a longer period would translate into servicing an expensive loan.
  5. Turnover limit: Fintech companies mandate a minimum revenue of Rs 40 lakhs. A healthy, regular revenue stream is vital to enjoying convenient tenures. In case, the business is not earning proportionately to the loan amount being applied for, the application may be rejected or the tenure drastically shortened to compensate for the higher default risk.

Loan tenure is an important factor while availing start-up business loans. A small business must accurately evaluate its repayment capability, the revenue being earned and the loan amount before suggesting a loan tenure to the lender in its loan application. Therefore, one must evaluate all factors and select a business loan with optimal repayment tenure.