10 Reasons Why Business Loans are Financially Beneficial

Entrepreneurs running a small or large venture are usually advised to look at various means to support and indeed expand the scale of operations for the future. Even if one has the means to keep putting their own money as equity to fund the venture, a prudent way to run the financial operations is to look at a mix of debt and equity.

Debt can be through two types: one backed with a security and the other without any collateral. In the case of the former, one needs to furnish some asset as a security. So, for a secured business loan one may have to pledge the factory premises, if one is looking at a large loan for a long term.

But one form of business loan that is more commonplace and is available in a jiffy is an unsecured business loan. These are meant for requirements of a few lakhs going up to Rs 50 lakh, though some lenders could advance even more money for the purpose.

Here’s a ready reckoner of ten reasons why such business loans are financially beneficial:

1. Retain Control:

If one brings in external investors on board, they would pick up an equity stake in the business. If it is a very large stake a business owner loses control over the enterprise as someone else owns a majority stake. However, even if the investors have a small stake they could claim to have a say in the affairs of the business. Moreover, the profit, if any, would need to be shared with those investors in the form of dividend or in some other form. The investors would also expect the company to grow at a certain pace and would put pressure on the business owner to meet those targets.

2. Ease Of Availability:

Unsecured business loans are easily available at the click of a button. One needs to have basic KYC details and paperwork in place and the loan can be applied for digitally and is also approved online.

3. Flexibility For Use:

Lenders do not interfere on the usage of the money advanced in the form of an unsecured business loan as an external equity investor would do. This provides flexibility to a business owner to deploy the money as required as against a fixed purpose that could change in a dynamic environment.

4. Collateral-Free:

These business loans do not require any security. As a result, the business owner does not need to pledge any collateral and risk losing it due to unforeseen circumstances in the future in the event of a default. It also comes in handy when the small business does not have any particular asset to pledge.

5. Reasonable Interest Charge:

These loans are not the cheapest option but come with reasonable interest rates as hundreds of banks and non-banking finance companies (NBFCs) are vying to lend to small businesses.

6. Working Capital:

While one can use it for planning for business expansion such loans can also be useful for meeting business exigencies such as a sudden new order which requires a venture to buy raw materials not previously budgeted for or to meet some expenses due to delay in client payments.

7. Multiple Options:

Business loans come in various forms, some of which are meant for specific use case, such as a machinery loan for buying some equipment where the purchased item itself becomes a pledged asset. Similarly, lenders offer unsecured loans to meet the needs of another set of business ventures.

8. Tax Benefits:

Most people do not realise that business loans also come with tax benefits. While it does not offer similar benefits like a housing loan where both the principal and tax outgo are tax deductible, the interest expense for repaying the loan is deducted from the taxable income of the business entity. So, if the entity is in profits, one can get a benefit from the interest expense of the business loan.

9. Quick Disbursal:

Given that unsecured business loans come with requirement of minimal paperwork and can be applied for digitally, an entrepreneur does not have to put on hold the business operations or expansion project waiting for sanction and disbursal of the loan amount.

10. Improve Credit History:

The business loan also comes handy in creating a business credit history, thereby building a credit score for the future. This does require one to make timely payments but once one gets a good credit history for a venture, business loans can be taken at far better terms in the future.

Conclusion

Business loans, whether security-backed debt or an unsecured one, helps not just with resources for meeting day to day needs but also to plan for future expansion. Collateral-free loans, in particular, are beneficial as these can be availed quickly without end-use clauses and diluting equity stake for a business owner.

IIFL Finance offers both secured and unsecured loans via a digital process. Its unsecured business loans can be availed to borrow as much as Rs 30 lakh without the need for any collateral and can be repaid in as many as five years. The loans are disbursed within 48 hours of application. IIFL Finance also provides secured business for up to Rs 10 crore and a tenor of 10 years.