What Banks Look for When Providing Small Business Loans Vs Unsecured Loans

Running a business in Sri Lanka is extremely difficult. Leaving aside the complete lack of entrepreneurial education and encouragement in one’s youth, there are so many barriers even once you manage to finally get your business off the ground. One of the most challenging aspects of running a business is managing the costs of running one. Most businesses require capital to get started and even more to keep it running until it is profitable and has enough cash flow for smooth operation. The regular costs of overheads (premises, utilities etc.) and salaries are not supported by irregular payments from clients and billing cycles. Even a profitable business tends to have cash flow problems in Sri Lanka. At some point in time, every business would need to consider taking out business loans.

Why do businesses need business loans?

Why do businesses need loans?

Most businesses require business loans for one of two reasons:

  • As working capital to ensure smooth business operations
  • To fund business expansion into new ventures

However, even though a business has very legitimate reasons for wanting to take out a business loan, the unpleasant reality is that banks aren’t very generous when it comes to business loans in Sri Lanka, especially SME loans.

Requirements of Banks for Business Loans

Getting a loan from a bank is notoriously difficult; however, business and SME loans are far more complex than even personal loans. Some of the main requirements banks ask for when it comes to business loans and SME loans are as follows:

Business Plan

You are required to produce a lengthy business plan detailing not only the current state of the business, but also your vision for its future. If there is any mismatch between your current state and future vision, the bank might reject your loan on the grounds of not having a strong-enough business plan.

Purpose of Loan

You need to inform the bank exactly what you plan to do with the entirety of the requested money and the bank will unilaterally decide whether your reasons are valid enough to justify requesting for a business or SME loan.

Personal Information and Credit History

The bank checks your personal information, including credit history, prior to approving or rejecting its business loans. While it might seem unfair as the business is considered a separate entity, the bank requires you to submit a lot of personal information when applying for the loan.

Financial Statements

While it makes sense for the bank to request detailed financial statements of your business, they will likely not approve business or SME loans to poorly-performing companies, which is ironic because it is those companies that mostly require money in the first place. Banks are very concerned about profitability and cash flow.


Banks also tend to require collateral or personal guarantors for their business loans to protect their best interests, which isn’t the most feasible. Most companies operate on rented premises and vehicles, which cannot be put up as collateral, and asking employees to shoulder the burden of company debt is extremely unfair.

All in all, while almost all companies would need to consider business loans or SME loans from a bank, the entire process and the bank’s hefty list of requirements sometimes makes this unfeasible. However, most companies are finding some reprieve in the form of unsecured loans for their businesses.

Unsecured Loans for Businesses

While unsecured loans are more commonly known as payday loans and being targeted at individuals, the potential for unsecured loans to act as legitimate funding for companies has grown at an unprecedented rate. More and more businessmen, businesswomen and entrepreneurs are approaching companies like OnCredit.lk for unsecured loans for their businesses. The biggest advantage that unsecured loans provide is that the lender does not require extensive documentation, personal information and 10-year business plans to approve a loan. Instead, it only looks at potential for repayment. Companies can greatly benefit from these easy, fast and convenience business loans. Unsecured loans means that the lender undertakes the bulk of the loan risk, the tradeoff being higher interest rates and associated service charges.

Advantages of Unsecured Business Loans

Quick & Easy

  • Quick: unsecured loans can be approved / rejected in a matter of hours
  • Easy: applying for unsecured loans requires minimal documentation
  • Online: unsecured loans can even be applied for online, in your own home or office

Disadvantages on Unsecured Business Loans

Higher interest rates: as the lender does not receive any collateral or proof of assets to seize and cover the loan in case the business cannot repay the loan, the lender makes up for this risk by changing higher interest rates and other applicable fees.

When all else fails, and your business requires a quick injection of funds to continue running or to grow but the bank isn’t being co-operative, business or SME loans in the form of unsecured loans are sometimes the best option available. With a plethora of benefits as well as some serious risks, every business owner should consider all their options and take the right decision in the best interest of the business and every last stakeholder, from investor to employee.