Finding the right source of funding for your startup is more important than you think. It affects the growth potential, your authority, and the future of your business. If you’ve been following our blog, you will know just how significant funding is for all businesses, especially startups. This blog post covers one such popular source of funding for startups: collateral-free loans. Read along to learn how you can avail startup or small business loan without collateral in India in 2022.
What Are Collateral-free Loans for Startups, and How Does it Help Businesses?
As the name suggests, collateral-free loans (also called unsecured loans) are loans offered by banks and other financial institutions where the borrower or the entrepreneur of a small business or new business does not have to provide any security or collateral to secure a loan. Collateral requirements, in this case, can include business assets, properties, gold, etc. Remember, these loans should not be considered personal loans. Businesses can avail of loan amounts between a few thousand to lakhs and crores, depending on the lender’s policies.
For example, let us assume you started your business at the beginning of the pandemic and are entirely remote. You now want to secure a loan for its further development. You do not have any tangible assets to show to the bank since the operations are fully remote. In such cases where you do not meet the collateral requirements, you will be able to avail a collateral-free loan that you can use for the growth and development of your startup.
While the most significant benefit a business can reap from collateral-free loans is that they don’t have to furnish any securities, there are other attractive benefits of leveraging collateral-free business loans:
- Collateral-free loans have a quicker approval process
- They help improve the credit history of the borrower
- Collateral-free loans have a more flexible repayment tenure
- They typically have lower interest rates
- You don’t need to dilute your equity
- Collateral-free loans have minimal documentation requirements
ProTip: If you want to get a collateral-free startup business loan, you will need to have a good credit score. A score of 750+ is generally healthy and significantly improves your chances of getting a business loan approved, as well as negotiating lower interest rates.
Best Available Startup Business Loans Without Collateral
In India, there are multiple banks and NBFCs that offer collateral-free business loans for startups. Some of the prominent loans are:
Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE): Launched by the Government of India for MSMEs, the CGTMSE helps many small and startup businesses to take a loan for their business expansion at a reasonable rate of interest. The loan amount to be given to the business depends on its eligibility and feasibility. The maximum limit for the loan is INR 1 Crore. The banks which are eligible to avail of this scheme are all scheduled commercial banks, public and private sector banks, foreign banks, and selected Regional Rural Banks (RRBs).
MUDRA Loan Scheme: The Micro Units Development and Refinance Agency (MUDRA) scheme provides adequate funds to the micro units and the non-corporate small business in India. Under this scheme, businesses can avail of three types of loans:
- Shishu Scheme – Get a loan for a startup up to ₹50,000/- at a 1% rate of interest chargeable every month. The repayment period for this loan is 5 years
- Kishore Scheme – The loan range is between ₹50,000/- to ₹5 Lacs
- Tarun Scheme – The loan range of this loan is between ₹5 Lacs to ₹10 Lacs
Term Loan: Term loans, as the name suggests, are loans provided by financial institutions for a specific term or period of time. Broadly, there are two types of term loans: short-term loans and long-term loans. The main difference between the two is the interest rates and the repayment tenure.
Working Capital Loan: Working capital loans are the loans that are availed of for working capital needs. This loan covers day-to-day business expenses and is approved based on the applicant’s credit history and repayment capabilities.
Merchant Cash Advance: A merchant cash advance is a cash advance based on credit card sales deposited in the borrower’s account. The loan amount is determined by the business’s credit card swipes or monthly volume.
Invoice Financing: Invoice financing is a form of short-term borrowing which is extended by the bank or a lender to its customers based on unpaid invoices. Invoice financing is often carried out to meet the short-term liquidity needs of the company.
Standup India Scheme: To encourage the startup scene in India, the Government of India, in association with various financial institutions, has introduced a multitude of schemes for startup funding. One such scheme is the Standup India scheme which is specific to entrepreneurs (mainly women) of scheduled caste and scheduled tribes for setting up greenfield enterprises.
Lines of Credit: A Line of Credit allows businesses to take only the amount which is required for the time being until the limit is reached, as opposed to taking the whole amount at once. The bank will only charge the interest on the loan amount used in the business instead of changing it on the full loan.
Additionally, there are business credit cards, equipment financing, machinery financing, and more that can be availed by the business.
Eligibility Criteria for Getting a Startup Business Loan Without Collateral
As is the case with any funding source, startup loans without collateral also have a few eligibility conditions that the borrower has to meet. While each financial institution can have its own criteria, here are a few common conditions:
- The business applying for the loan should not be more than 5 years old
- They must get a patron guarantee from the Indian patent and trademark office
- The business must have a solid business plan, and a unique product in place
- The firm should get approval from the Department of Industrial Policy and Promotion (DIPP)
- The borrower must have no previous defaults with any financial institution
- At the time of loan application, the borrower must be at least 18 years old, and at the time of loan maturity, they must not be older than 65 years old
- A credit score of 750 or higher is required
- The applicant must have a steady source of monthly income, as evidenced by payslips
- Bank account information or a bank statement for the previous six months
Documents Required for Startup Business Loan Without Collateral
As we mentioned earlier, the documentation process for startup business loans without collateral is minimal and hassle-free. In India, you have to have the following basic documents to be eligible to apply for collateral-free startup business loans. These are:
- Duly filled application form provided by the lender
- Passport size photos (We suggest having at least 5-10 pictures)
- Proof of address (This can be your Aadhar card, Passport, or Driver’s license)
- Proof of age (You can either submit the Aadhar card, driver’s license or your PAN card)
- Proof of business (You can show your business registration certificate)
- A solid business plan with all intricate details
How to Apply for Collateral Free Loans for Startups in India
Any business looking to avail startup business loan without collateral has two ways of going about it:
- The business owner can go to the lender’s website online and fill out the application form on the website. Different lenders have different forms for availing of loans. They must then submit the necessary KYC documents online/go to the branch, depending on the lender’s rules.
- The business owner can directly visit the lender’s nearest branch and apply for the loan. They must, again, ensure they have all the necessary documents that need to be submitted along with the loan application form.
Who can benefit from a startup business loan without collateral?
Collateral-free loans can benefit SMEs, professionals, manufacturers, service providers, and traders for their business expenses.
Why is credit history important for collateral-free loans?
Collateral-free loans are risky for lenders. The credit score helps lenders check whether the business owner has a creditworthy relationship with the bank and determines their capacity to repay the loan within the stipulated time.
What happens if you default on a collateral-free loan?
Though the loan doesn’t ask for collateral to avail the loan, the bank can take legal action against the business owner. They can also commission the collection agency to collect the debt.
Can you pre-pay the loan?
Yes, some lenders offer the prepayment facility at cost. That is, you will be charged a sum for prepaying the loan.
At Velocity, we believe financial literacy is the first step to achieving greater heights for any business. In our journey to ensure every entrepreneur is fully aware of their options for funding their dreams, we constantly come up with crisp, informative, and enlightening content. You can check out our other blog posts on other funding sources here:
- A Comprehensive Guide to Startup Business Loan in India 2022
- Revenue-Based Financing – A Complete Guide
- Business Loans For Women Entrepreneurs By The Government of India
- Top 10 MSME and Startup Business Loans by Government of India
Being India’s largest revenue-based financier, Velocity provides founder-friendly revenue-based business loans to growing DTC businesses. To learn more about Velocity’s financial solutions and to discover how revenue-based financing can benefit your company, click on this link. If you are a D2C brand looking for funding to manage your inventory and marketing needs, apply here, and get funded within 7 days.