How to Get a Start-up Business Loan without Collateral?

Do you have a great idea to start your own business? Are you sure that the funds you have will be enough to start a new business? If at all you happen to require more capital, from where can you procure the loan? What if you cannot give surety for such loan? Who will give you a loan without collateral? These are some of the questions that bother us when we think of starting a new business.  The dilemma is universal. How to procure a start-up Business Loan without collateral?

Mobilising fund is the greatest challenge faced by the entrepreneurs anywhere in the world. It is not easy to qualify for most of the loan schemes offered by banks and financial institutions for start-up businesses. Most of these options require a track record of business performance, additional collateral security in the form of unencumbered property.

The other factors that come into consideration for granting such Business Loans would be the amount of the loan, type of the business, number of partners, and so on. Because of all these requirements, most of us are turning to our family and friends for raising money, which may have its limitations. Therefore, many time entrepreneurs are forced to approach local private money lenders who often charge exorbitant interest rates. This article intends to help such budding entrepreneurs achieve their goal by throwing light on various options and easy loan schemes that are available in the market without collateral.

MUDRA (Micro Units Development & Refinance Agency Ltd.) scheme by the ministry of finance, India

What is this scheme?

The honourable Prime Minister of India has launched Pradhan Mantri MUDRA Yojana (PMMY) as the name suggests in the year 2015. This scheme is facilitated by refinancing support to Banks/ MFIs for lending loans to micro units having loan requirement upto 10 lakh. So, if you are either one of the following, i.e., a non-corporate or non-farm small/ micro-enterprise, you can avail Business Loan under the MUDRA loan for an amount up to Rs. 10 Lakhs without any collateral. Depending on the stage of growth of the business and amount of loan required the scheme is divided into three categories.

  • If you require a loan up to Rs. 50,000, you will be covered under Shishu Yojana.
  • If your loan requirement is over Rs. 50,000 and under Rs. 5,00,000 you will be covered under Kishor Yojana.
  • If your loan requirement is over Rs. 5,00,000 and under Rs. 10,00,000 you will be covered under Tarun Yojana.

While there will not be any processing fee if you are availing loans under Shishu or Kishor Yojana, you will be charged with a processing fee of 0.5% of the loan amount plus applicable taxes for loans under Tarun Yojana.

What are the qualification criteria for this loan?

  1. Your firm should be a private limited company and should have SME/ SSI registration.
  2. Angel /VC investor should fund your firm. It is not mandatory for such Investors to be registered with SEBI.
  3. A share purchase agreement and a share allotment proof are required.
  4. 10% of the financing cost for the project should come from promoters, and 20% from the investors (angel funds, VCs, individuals). The remaining 70% can be taken as a loan.
  5. Types of the loan – A Term loan or working capital assistance will be provided according to your requirement.
  6. The term loan is given for a maximum period of 7 years and the maximum moratorium period for such a loan is 3 years.
  7. The loan is covered under CGTMSE (credit guarantee fund trust for micro and small enterprises) scheme. The promoters’ guarantee is required. The coverage is chargeable.
  8. Expenses that are eligible for a loan under this scheme: Product development expenses, Purchase of machinery, tools, computers, and so on.

How can you avail this loan?

Your start-up company cannot provide track record, revenue flow, last 3 years balance sheet, and so on, and what if you do not have collateral security? Under this scheme, the above-mentioned are not the parameters to extend a loan. Under this scheme, the bank analyses the promoter team, investor’s profile, innovative idea and revenue visibility. A whopping total of 203 banks and other financial institutions are tied-up with the government to provide these loans. The refinancing partner of the government for these loans constitute of Co-operative Banks, MFI, NBFC,  NBFC-MFI, Private Sector Banks,  Public Sector Banks, RRB, SFB.  So, you can approach public sector banks like Standard Chartered for loans like Standard Chartered Bank Business Loans or other banks such as SBI, Vijaya Bank, Dena Bank, or private sector banks like ICICI Bank, Yes Bank and so on, and avail this loan based on your merit and without collateral.

The Credit Guarantee Scheme (CGS)

This scheme was launched by the government of India to extend collateral free credit to micro and small enterprises. You can avail this loan if you are a start-up company or an existing enterprise. The loans are extended at reasonable interest rates. The amount of loan given to you depends on your eligibility and also the feasibility of your business proposition. You can avail up to 1 crore under this scheme.

Start-up India Scheme

The government encourages new start-up companies under this scheme, and the maximum amount of Business Loan that you can avail along with a host of other benefits like tax exemption is up to Rs. 5 Crores. The rate of interest and tenure of the loan varies from bank to bank. The tentative interest rate ranges from 10.99% to 21% a year depending on other related parameters. A company can be called a start-up company for 5 years since its inception.

The process to obtain any of the above loans has been simplified, and you can apply online for all these loans. You can go to the related bank websites or financial institutions and apply. A list of the institutions that provide a loan under various schemes is available at their respective websites.

Other Business Loans Options Without Collateral

Many entrepreneurs rely on the Unsecured Business Loan options for their business capital needs.  There is a number of categories that come under these types of loans. In recent times, P2P loans, i.e., peer to peer loans are gaining popularity. Business Credit Cards have become an essential tool in the hands of entrepreneurs. Merchant loans, which are extended at very high-interest rate are also prevalent in the market.

To sum up, if you have a good project report and innovation, you can avail a start-up loan without collateral without high-interest rates using the many schemes offered by the government.