Business enterprises, especially the start-up entrepreneurs generally face problems finding money to finance their businesses. They are new to the industry having many ideas and enthusiasm to achieve something. However, the lack of adequate finance does prove a deterrent to them. This has discouraged many new entrepreneurs from venturing into the market. Seeing this, many Governments are bringing out schemes to help them out. The credit institutions too are playing their part by coming forward to sanction unsecured business loans. When we use the word, ‘unsecured’, we mean the absence of the stipulation of collateral for business loans.
The credit institutions have a variety of services to offer to the business entrepreneurs today. This includes sanctioning of business loans as well as business credit cards. Now, the businessperson is in a dilemma whether to go in for a credit card or a business loan. This blog will help to clear the misconception. We shall take one aspect at a time.
Before we go into the details of solving the dilemma, we have to understand the difference between a credit card and a business loan.
The business enterprise has a plan ready for implementation. When the enterprise approaches the credit institution with a credit proposal, they evaluate the proposal according to their rules and regulations and come up with a figure they feel would be feasible and viable for the enterprise. In case the enterprise agrees to the amount, they proceed with the sanction. The loan could be for procurement of fixed assets or for meeting the requirement of working capital.
When the objective of the loan is to procure assets such as machinery, the business enterprise does not have any option but to agree to the business loan. The facility envisages repayment by way of monthly instalments. The banks factor the interest component and fix up equated monthly instalments for a fixed period of time after allowing for a moratorium for allowing the enterprise to procure, install, commission the machine and start production.
However, when the requirement is for procurement of working capital purposes, then the best way to finance these accounts is by sanctioning an overdraft account or by issuing unsecured credit cards with a regular limit. This would be a running account with the incoming credits not having any effect on the nature and amount of the sanctioned limit. The advantage of this system is that the entrepreneur would be able to withdraw as much as he actually requires at a particular time. He has the facility of depositing the proceeds of the sales of his products into the account whereby he saves on the interest component. As this is a kind of a running account, he would be able to deposit or withdraw as he pleases but within the confines of the sanctioned limit. Such kinds of unsecured business credit lines are very common all over the world.
You have seen two kinds of unsecured business loans here. Both are equally important in their own way.