When one thinks about a business loan, the first thought that might strike their mind is, “Is there any money lending institution that provides a business loan without collateral security?” Well, to answer this, yes, there are a few lenders that offer business loans without any collateral security.
What are the Benefits of Collateral-free Loans?
As the term ‘collateral free’ is self-explanatory, but to explain in simple words, it means that the borrower is not bound to collateralise any of their properties to avail the loan. Generally, these kinds of loans are risky for the lenders, so they charge a bit higher interest on business loan in India. Finding the right lender though can turn out to be a win-win for both the parties.
Schemes Under Which a Burrower Can Apply for a Collateral-free Business Loan
The biggest concern for a start-up entrepreneur is collateral. A collateral-free loan thus allows the entrepreneur to run their business through necessary funding with no security or collateral to provide. The Indian Government has taken measures to promote and provide finance for many small-scale industries and business start-ups. The government has introduced various loan schemes to start-ups without the need for collateral or security.
- The Micro Units Development and Refinance Agency (MUDRA): The main goal of this scheme is to provide sufficient funds to both micro units and non-corporate small companies. A bank can facilitate loans under the MUDRA Scheme according to the customer’s needs. This scheme provides collateral-free loans.
- SUI (Stand Up India): Stand-up India, a government-backed scheme, aims at financially empowering SC/ST and women entrepreneurs. These banks offer loans between Rs.10 Lakh and Rs.1 Crore to SC/ST borrowers. This is for the purpose of setting up an enterprise in manufacturing, service, trading, or other sectors.
- CGTMSE: Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) is open to both existing and new enterprises. The amount of loan granted to any individual depends on their eligibility and the viability of their company. This scheme has a maximum limit of Rs.1 Crore per borrowing unit without collateral.
- Market Development Assistance Scheme for MSMEs: This scheme allows for exposure of Micro, Small, and Medium Enterprises at international exhibitions, study abroad tours, trade fairs, and other events under the MSME India kiosk. The main goal of this scheme is to highlight the potential and strengthen MSMEs.
Eligibility Criteria to Avail Business Loan Without Collateral Security
There are certain standard eligibility criteria that a borrower is needed to fulfil to avail a loan without collateral under such schemes. They are:
- Age of business: The business must not be older than five-years in existence.
- Uniqueness: The borrower must have a unique business idea or innovative product. This uniqueness prompts lenders towards providing loans without any collaterals.
- DIPP: The business should be Department of Industrial Policy and Promotion (DIPP)-certified.
- Trademark: The Indian patent and trademark office must issue a patron assurance to the firm.
- Clean credit history: The borrowing business must not have any existing overdue or any payment failure record registered under its name.
Required Documents to Apply for Business Loan Without Collateral Security
- The loan seeker must produce certain documents like Aadhaar, Voter ID, etc. for residential proof and proof of identity.
- ITR filed, audited income files, company documents, GST Bill, etc. Or any document that can prove income status of the borrower.
- Business-related documents like MOA, Trade license, company TIN, company PAN, etc.
Generally, interest on business loan in India is higher than that of secured loans. For such loans, the lender has the option to recover its invested money by selling or auctioning the property. But, business loan without collateral security also brings a range of benefits that make them attractive and suitable for business funding.