Major Challenges in Fundraising for Unsecured Business Loans
Many small businesses, startups, and expanding companies frequently require prompt access to capital. However, securing funds through unsecured business loans often presents difficulties.
Unlike secured loans, which require collateral, unsecured business loans don’t need assets as security. This makes them attractive—especially for businesses without significant assets. However, the “no collateral” benefit has its own set of challenges.
Let’s examine the main issues businesses encounter when obtaining funds via unsecured business loans in India.
1. Tough Qualification Requirements
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Though unsecured loans seem attractive, the requirements to qualify are stricter. Loan providers examine:
- Business age (typically requiring at least two years in business)
- Steady revenue generation
- Positive credit rating (CIBIL score of 650 or above)
- Solid repayment track record
Startups or businesses that have unpredictable income might find it challenging to fulfill these conditions.
2. High-Interest Rates
Because these loans lack backing security, lenders see unsecured loans as risky. Consequently, the interest rates are often much greater, typically in the range of 14%–20% annually, based on the borrower’s standing. This increases the repayment expenses, and can be unfeasible, specifically for companies with low profits.
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Even if a business qualifies for an unsecured loan, the approved amount is usually lower compared to a secured business loan.
Most lenders sanction between ₹10 lakh to ₹1 crore depending on financials, whereas a secured loan can go far higher.
This becomes a problem when the business requires larger capital for expansion or urgent requirements.
4. Credit Score Dependency
When it comes to unsecured loans, your credit rating is paramount. A CIBIL score under 650 significantly diminishes the likelihood of getting a loan approved.
Even missing a single EMI payment or delaying credit card payments can negatively influence your score, resulting in either denial or higher interest charges.
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5. Lack of Collateral = Low Trust Factor
In India’s established banking environment, the absence of collateral can raise suspicion. Many financial institutions still prioritize security, which makes building trust hard for modern entrepreneurs and small enterprises. This mental obstacle diminishes the likelihood of loan acceptance, even with solid financial performance.
6. Limited Tenure for Repayment
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Most unsecured loans come with shorter repayment periods, typically between 1 to 5 years. This means higher EMIs, putting pressure on monthly cash flow — a major issue for seasonal or service-based businesses.
7. Documentation Delays
Despite being marketed as “quick business loans”, unsecured loans still involve substantial paperwork:
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- KYC documents
- GST returns
- Bank statements
- ITR filings
- Business registration proof
Any mismatch or missing document can lead to delays or outright rejection — defeating the purpose of urgent funding.
8. Difficulty for New Businesses or Startups
Startups, especially those in their first year, face extreme difficulty in securing unsecured loans.
Why?
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- No financial history
- No asset backing
- Weak or non-existent credit profile
- Limited monthly turnover
In such cases, even fintech lenders hesitate unless supported by venture funding or strong co-founders.
9. Risk of Debt Trap
With elevated interest rates, shorter loan terms, and numerous EMI payments, companies can get stuck in a debt trap if they mismanage their finances. Many businesses borrow more money to settle existing debts, which creates a cycle of financial strain. This is particularly true when the business fails to achieve sufficient returns from the borrowed capital.
10. Limited Lender Options
Though many fintechs and NBFCs offer unsecured loans today, not all are reliable.
Choosing the wrong lender can result in:
- Hidden charges
- Undisclosed pre-closure penalties
- Poor customer service
- Irregular disbursement
Business owners must do proper research or work with trusted consultants like NKB Kredit to choose the right financing partner.
How NKB Kredit Helps Overcome These Challenges
At NKB Kredit, we understand that small businesses often face these exact hurdles.
With our strong relationship7 of trusted Banks, NBFCs and financial Institutions, we help clients
- Get faster approvals even without collateral
- Secure customized loan offers
- Ensure low interest rates based on profile
- Handle all paperwork and follow-ups
- Choose the right lender, avoiding frauds and hidden charges
We don’t offer loans directly — we consult, guide, and simplify the entire funding journey.
Final Thoughts:
Securing financing without collateral is achievable, though it’s often challenging.
Given the growing need for loans that don’t require assets, the market is ripe with chances – yet it also presents risks.
Being aware of these obstacles and preparing beforehand can help you avoid rejection, steep monthly payments, or unfavorable loan conditions.
Frequently Asked Questions (FAQs)
An unsecured business loan is a loan that does not require any collateral or asset as security.
Typically, businesses with at least 2 years of vintage, regular income, and a good credit score are eligible.
Yes, they usually have higher interest rates compared to secured loans due to higher risk for lenders.
Startups can apply, but approvals are tough unless they have strong financials, co-founders, or backing.