Unsecured SME Loan


A.    Unsecured SME Loan:

An Unsecured SME Loan is a lending agreement made between business owners and financial institutions for financing on small and medium enterprises (SME) without collateral. Businesses need capital, either to run operations or simply to start themselves up and begin turning a profit. Financial institutions are willing to give them the money in advance, so long as they pay it back on an agreed-upon schedule with interest. Repayment terms can vary from 1 year to 3 years, depending on the type of loan and the lender.


B.    Purpose:

Unsecured SME Loan is a loan that can avail by the business entity to meet the following business needs rather than personal needs:

-  Startup costs;

-  Improve cash flow;

-  Debt consolidation;

-  Inventory purchase;

-  Business expansion;

-  Business franchising;

-  Equipment purchases;

-  Increase working capital;

-  Cover construction costs;

-  Overcome unpaid invoices;

-  Debt consolidation & refinancing;

-  Improve and expand new market;

-  Other financial requirement related to business;


C.    Benefits:

-  Tax benefits;

-  No sharing of profits;

-  Convenient and easy;

-  Working capital support;

-  Competitive interest rate;

-  Flexible enjoyable tenure;

-  Improved business credit;

-  Flexible repayment schedule;

-  Low processing fees & charges;


D.    Some Basic & Common Features of Unsecured SME Loan:

Now a days, various financial institutions are offering most attractive features for the consumers, who wants to avail the Unsecured SME Loan. Followings are some basic and common features of Unsecured SME Loan offered by most of the financial institutions that need to be kept in mind:


       (a)   Who Can Avail?

              -  New Entrepreneurs / Businessman;

              -  Existing Entrepreneur / Businessman;


       (b)   Eligible Entity Type

              -  Proprietorship;

              -  Partnership Firm;

              -  Private Limited Company;


       (c)   Eligible Business / Project Type

              -  New Business / Project Setup;

              -  Existing Business / Project Expansion;


       (d)   Eligible Business / Project Nature

              -  Manufacturing;

              -  Trading;

              -  Service;

              -  Agriculture;


       (e)   Applicable Areas

Any business viable area in Bangladesh.


       (f)    Entrepreneur / Businessman Age Limit

              -  Minimum Age     :  18 Years;

              -  Maximum Age    :  65 Years;


       (g)   Professional Experience

Required professional experience are varies based on business / project credential. In average cases, most of the financial institutions are referring following professional experiences for the consumers.

              -  Businessman     :  Minimum 1 years of business experiences;

              -  Professional       :  Minimum 2 years of professional experiences;


       (h)   Interest Rates

All Banks are currently offering 9.00% or below interest rate for Unsecured SME Loan product. NBFI’s also offering Unsecured SME Loan product against little bit higher interest rates with additional key features.


       (i)    Fees and Charges Related to Unsecured SME Loan

Apart from interest charges, some additional fees & charges may also applicable to an Unsecured SME Loan. Followings are the some of the most common fees & charges that should be kept in mind:

              -  Stamp duty;

              -  Processing fee;

              -  Late payment fee;

              -  Early settlement fee;

              -  Partial payment charges;

              -  Property valuation charges;

              -  Document verification charges;

              -  Other fees & charges;


       (j)    Loan Type

              -  Term Loan;

              -  L/C Facilities;

              -  Working Capital Finance;


       (k)   Loan Tenure

              -  Minimum       :  6 Months;

              -  Maximum      :  48 Months;


       (l)    Loan Limit

Depends on business / project credential. Most of the financial institutions are offering minimum 2 lac to maximum 50 lac.


       (m)  Disbursal Time

Depends on business / project credential. In average cases, most of the financial institutions are completing the total procedure within 30 working days.


       (n)   Securities / Collateral

As Unsecured SME Loan is an unsecured loan product, only businessman / entrepreneurs personal guarantee is considered as security / collateral.


       (o)   Repayment Mode

Flexible repayment polity through Equal Quarterly Installments over a period of 6 moths to 48 months.


E.    Unsecured SME Loan Interest Rate and Calculating Method:

Interest rate refers to the rate at which interest is applicable on any amount borrowed from a financial institution. Interest rate is one of the most important factors that determine selection of a loan offer. Thus, one should always compare interest rates from multiple lenders before settling on a loan offer.


(a)   Interest Rates

In most of the cases, Unsecured SME Loan interest rate set on fixed rate basis. In this case, the rate of interest remains constant throughout the loan tenure. Consequently, quarterly EMI amount also remains fixed throughout the loan repayment period.


(b)  Calculating Method (Quarterly EMI)

In our country, Unsecured SME Loan interest calculation follows reducing balance method. In this method, as you pay off your quarterly EMIs, parts of the loan amount and the interest component are paid off. Thus, the principal loan amount keeps on decreasing with time and interest is calculated on this decreasing loan amount and not the total amount initially borrowed.


F.     Factors Affecting on Unsecured SME Loan Eligibility:

Unsecured SME Loan eligibility depends on many more factors. Most of the financial institutions are considering following eligibility factors before approving any Unsecured SME Loan application.

-  Business age;

-  Business plan,

-  Business nature;

-  Business location;

-  Business turnover;

-  Feasibility analysis;

-  Entrepreneur’s age;

-  Repayment History,

-  Cash Flow analysis;

-  Banking relationship;

-  Business experience;

-  Other loan burden (if any);


G.    Things to Consider before Applying for an Unsecured SME Loan:

Before applying for an Unsecured SME Loan, consumers should consider following factors.

-  Loan limit;

-  Interest rate;

-  Loan tenure;

-  Processing time;

-  Fees & charges;

-  Required documents;

-  Compare all financer’s rates & features;


H.    How to Improve the Chances of Availing an Unsecured SME Loan:

As Unsecured SME Loan is an unsecured loan product, lenders have a pre-decided set of rules (credit policies). Many loan applications get rejected as the borrower do not fulfil the basic set of rules of lenders for approval of the Unsecured SME Loan. Hence, the borrower works on improving his or her chances of availing an Unsecured SME Loan using some simple tips.

-  Proper business plan;

-  Identify the right lender;

-  Avoid negative balance;

-  Ensure healthy cash flow;

-  Include all sources of income;

-  Keep proper financial records;

-  Maintain clean past loan records;

-  Identify options for bad credit loans;

-  State the amount of loan exactly required;

-  Be honest and provide accurate information;

-  Maintain entrepreneur’s professional stability;

-  Avoid multiple loan applications simultaneously;

-  Apply for a loan amount based on repayment capacity;

-  Provide all required documents as of lenders requirement;

-  Build & maintain smooth & functional relationships with the lenders;

-  Try to keep a gap of minimum 6 months between two loan applications;

-  Prepare complete Unsecured SME Loan proposal supported by all relevant documents as of lenders requirement;

-  Prepare business / project profile including market analysis data & feasibility study report along with technical & financial explanation;


I.      Required Documents:

To apply for Unsecured SME Loan there are various types of information / documents are required. Proper documentation is the only possible way to avail the loan facilities. Most of the financial institutions are considering similar guidelines in respect to the documents required for Unsecured SME Loan. A generic list of such documents has been provided below:

-  Complete loan application;

-  Complete business / project profile along with technical & financial explanation;

-  Proof of business / projects feasibility (technical, financial, business, banking);

-  Identity of business / project (all related permission. license, NOC, registration etc);

-  Proof of entrepreneur’s age, identity, experience, address, nationality, net-worth etc;

-  Other information / documents related to the business / project according to the lenders requirements;