How to Get a Small Business Loan Without Collateral?

Launching a start-up is the dream of many budding entrepreneurs in India. However, a major impediment to their aspirations is the formalities involved in securing a small business loan. Most banks and financial institutions have set the criteria to submit collateral before providing a loan. The founders of many start-ups may not have collateral such as property, gold, or vehicles in their possession. Hence the billion-dollar question is how to get a start-up business loan without collateral in India. In this article, we will discuss the various sources through which you can secure a government loan without collateral of any kind.

How to get a loan without collateral

In recent years, the Government of India has come up with several loan schemes for encouraging start-up ventures in the country. Let’s delve deep into how you can make use of the various schemes and secure a loan without collateral for new business in India.

1. MUDRA Loan Scheme

The Mudra loan scheme under Pradhan Mantri MUDRA Yojana (PMMY) was launched on April 8th, 2015, by the honourable Prime Minister of India. The scheme was introduced to support the small and micro-units in the country that are out of the formal banking system. In most cases, these units are forced to borrow funds from private financiers for higher interest or make use of their limited savings. Under the Mudra Scheme, the loan amount offered is up to Rs.10 lakh for micro-enterprises operating in trading, manufacturing, and services industries. The banks, Non-Banking Financial Institutions, and Microfinance Institutions in the country provide the MUDRA loan. Hence you can approach any of these institutions to secure the loan. There is also the option to apply online by visiting the portal https://www.udyamimitra.in/.

The MUDRA loans are offered under 3 categories:

a) Shishu – The loan amounts of up to Rs. 50,000 fall under the Shishu category. This scheme is aimed at supporting the needs of business start-ups.

b) Kishore  – The loan amount ranging between Rs.50,001 to Rs.5 lakhs belongs to this category.

c) Tarun – The amounts between Rs.5,00,001 to Rs.10 lakhs fall under this scheme.

Of these 3 categories, more emphasis is given to the Shishu category. The Kishore and Tarun schemes are offered based on the various stages of the business and the funding requirements of the entrepreneur.

2. Stand-Up India Scheme

The Stand-Up India Scheme is devised to support Scheduled Caste (SC) or Scheduled Tribe (ST) and/ or women entrepreneurs. Let’s explore the highlights of the loan scheme.

• Under this scheme, loans are offered in the amount ranging from Rs.10 lakh to Rs.1 crore for setting up a Greenfield enterprise.
• The term Greenfield means that it should be the first-time venture of the applicant in the manufacturing, trading, services, or agri-allied activities.
• The tenure of the loan is 7 years and the maximum moratorium period is 18 months.
• The Stand-Up India Scheme is provided by all the branches of the scheduled commercial banks in the country.

3. Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)

The Ministry of Micro, Small & Medium Enterprises (MSME) under the Government of India has introduced the Credit Guarantee Scheme (CGS). This scheme aims to support the first-generation entrepreneurs in building a Micro and Small Enterprise (MSE) business of their own. Towards this purpose, a Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) has been formed.

• There is no need to submit any external collateral or third-party guarantee.
• The scheme backs the lending institution (such as public and private sector banks, Non-Banking Financial Companies, scheduled commercial banks, foreign banks, selected Regional Rural Banks (RRBs)) that offers the loan. It provides guarantee cover for a major part of the loan amount.
• Under this scheme, both new as well as existing MSEs is eligible to apply for a collateral-free loan.
• The maximum credit cap of this loan is Rs.2 crore.

4. Market Development Assistance Scheme for MSMEs

The Market Development Assistance Scheme is managed by the Ministry of Commerce to encourage exporters (Micro, Small & Medium Enterprises exporters) to access and develop the international markets.

The scheme provides funding for

• Participation by manufacturing SMEs in International trade fairs and exhibitions.
• Industry-specific market studies conducted by Industry Associations/ Federation of Indian Export Organisation or Export Promotion Councils.
• Initiating or contesting anti-dumping cases by Micro, Small & Medium Enterprises Association.
• Reimburse 75% off the one-time registration fee paid to GSI (erstwhile EAN India) by small and micro-units in the first 3 years for bar code.

5. Bank Credit Facilitation Scheme

To facilitate the funding requirements of MSME units in the country, National Small Industries Corporation (NSIC) has signed a Memorandum of Understanding with different nationalised and private sector banks. As part of this arrangement, NSIC provides credit support (fund or non-fund based limits) from banks with absolutely no cost to MSMEs. All existing MSME units and those units applying for fresh loans are eligible to avail of this loan.

6. Coir Udyami Yojana

Coir Udyami Yojana or CUY is a credit-linked subsidy scheme offered by Coir Board. It is offered for establishing coir units with project costs less than Rs.10 lakhs plus one cycle of working capital, which should not be more than 25% of the project cost. For granting a subsidy, the working capital will not be taken into consideration. The primary objective of the scheme is to enable the sustainable development of the coir industry in India.

• The maximum admissible cost of the project, in this case, is Rs.10,00,000 and the additional working capital. As per the terms, it should not be more than 25% of the project cost.
• The contribution of the beneficiary is stated as 5% of the project cost.
• The bank credit rate for this scheme is 5%.
• 40% of the project is offered as the rate of subsidy.

For registering under this scheme, click here.

Conclusion

Securing a loan without collateral for a new business comes with several benefits. As an aspiring entrepreneur, you no longer have to be concerned about losing your collateral in case of loan default. Since unsecured loans offer short tenures, you can repay the instalments and boost your credit score. It will help you secure sanctions of bigger loan amounts in the future without much effort. Thus, as discussed above, the 6 loan schemes offered by the Government of India provide business-friendly loans that will help launch the business venture and expand your horizons in the future.

Also read:

1) What is a business loan? How to apply for a business loan?
2) Home Loan: Steps to apply, Best Interest Rates on Home Loans & more
3) What is Business Loan? A Complete Guide.
4) How To Get Small Business Loan From Government?

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FAQs

Q. If I apply for a Mudra loan, how long does it take for processing?

Ans. The Shishu loans, which offer lower amounts, are generally disbursed within a time frame of 7 to 10 days. Depending on the lender, the processing time for other categories of Mudra loans varies.

Q. Can you share more details on the fee charged by CGTMSE?

Ans. The trust fund charges a fee of 1% per annum on the amount sanctioned.

Q. Who is eligible for the Stand Up India scheme?

Ans. The applicant should be of 18 years or above to apply for this scheme. Apart from non-individuals, existing firms and businesses are also eligible to apply for this scheme. As per the terms, either SC/ST or women entrepreneurs should hold 51% of the shareholding and controlling stakes of the firm.

Q. Do I get any subsidy for Mudra Loan?

Ans. No. Under the Mudra Yojana, no bank or financial institution offers a subsidy.

Q. What are the eligibility criteria for an MSME loan?

Ans. For the last 6 months, the applicant must be operating an established business.  Just 3 months before applying for the loan, the firm should have a minimum turnover of Rs.90,000 or more.