TomorrowMakers

Collateral-free business loans with competitive interest rates, flexible replacement terms and minimal documentation have finally removed the biggest hurdle faced by aspiring entrepreneurs.

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COVID-19 may have disrupted normal life but it hasn’t dampened the human spirit. Offices are closed but work continues remotely, thanks to the internet. Construction activity is picking up and essential medical services are operational against all odds. 

While under lockdown, many budding entrepreneurs around the country have had plenty of time to analyse the market and put together a business plan. It is often a matter of survival for laid-off employees with 30% reporting being self-employed in a recent survey. The start-up sector also remained subdued throughout last year with up to 15% of companies going out of business. 

It is not all gloom and doom though. With the economy expected to grow at a rapid clip in 2021, experts say that there is plenty of scope in ventures such as e-commerce grocery platforms, online education, and delivery-only restaurants. For many aspiring entrepreneurs, the biggest question is: how to raise funds for business?

Until a few years ago, small business loans were seen as unviable by banks. The lack of proper books of accounts made it difficult for them to assess the creditworthiness of Small and Medium Enterprise (SME) borrowers. First-time entrepreneurs also faced extra scrutiny. Given the rise in Non-Performing Assets (NPAs), loan approval would be contingent on them having sufficient collateral. 

Consequently, a large number of small business owners would be left with no choice but to pledge their personal assets to finance their businesses or rely on traditional money lenders. Fortunately, this is now a thing of the past.

What has changed?

Prodded by the government, banks have been offering collateral-free business loans under a variety of schemes. The rapidly growing financial technology (fintech) sector has also played a key role by connecting borrowers to lenders, reducing loan turnaround times significantly. 

A key enabler has been the development of alternative credit scoring techniques that look beyond credit scores from agencies like CIBIL to approve or decline loans. For example, data pertaining to online buying patterns, insurance, tax, or utility payments, and even travel data is allowing lenders to reduce credit risk while offering flexible repayment terms and competitive interest rates. Thanks to these, it is now possible to get loans for business without security.

Related: Government schemes that can help women entrepreneurs in India grow their small businesses

Here’s a look at some of the most popular collateral-free business loans available in India today:

MUDRA loan

This is a government-backed scheme set up under its namesake, the Micro Units Development and Refinance Agency (MUDRA). These loans are ideal for those setting up a new business as well as existing entrepreneurs. The scheme aims to provide credit to micro and small businesses having an investment of up to Rs 1 crore. 

Three types of loans are available under MUDRA: Shishu, Kishore, and Tarun. Shishu loans of up to a maximum of Rs 50,000 are provided for business expenses such as machinery or raw material. Though no documentation is required, the applicant must provide proof of purchase, such as quotations or invoices. Kishor loans are ideal for business owners who have a larger funding requirement, with the maximum amount being Rs 5 lakh. Lastly, Tarun loans provide financing up to Rs 10 lakh, subject to certain terms and conditions.

Stand Up India Scheme

Stand Up India is part of the government’s Start Up India initiative that supports Scheduled Castes/Scheduled Tribes (SC/ST) entrepreneurs. It provides financing up to 75% of the cost of business projects worth a maximum of Rs 1 crore, across a variety of industries. The condition: the project should be a greenfield one, which means first–time ventures for the purposes of the scheme.

Further, the beneficiary should be the majority owner and should not have defaulted on any loan in the past. The maximum repayment tenure available under this scheme is 7 years.

Credit Guarantee Fund Trust for Micro and Small Enterprises (CGFTMSE)

This is a trust fund controlled by the government’s Ministry of Micro, Small and Medium Enterprises (MMSME). CGFTMSE provides collateral-free financing for loans of up to Rs 2 crore. However, funds are disbursed on the personal guarantee of the promoters of the business. Based on an assessment of the financial statements of the firm, the trust usually funds up to 15%-25% of its annual turnover.

The actual amount disbursed can vary from project to project. However, a processing fee of 1%-2.6% of the approved loan amount is payable.

Related: Business ideas for women who want financial freedom

Market Development Assistance Scheme for MSMEs

This scheme provides financial assistance to MSMEs participating in exhibitions and trade fairs overseas. It helps export-oriented units discover new market opportunities and bring valuable foreign exchange to the country. It also aims to level the playing field for Indian MSMEs in the global market by supporting them with respect to anti-dumping cases.

National Small Industries Corporation Subsidy

The National Small Industries Corporation (NSIC) provides business facilitation services including market intelligence, trade show management, and marketing. Once registered, Indian MSMEs can avail of bill discounting, loans, and overdraft services in addition to assistance in the procurement and testing of raw material. It provides consulting services to Indian MSMEs bidding for government contracts. NSIC members are exempt from paying tender fees and are eligible for loans under its Credit Support scheme.

Related: 10 Bank loan schemes for women entrepreneurs

Udyogini

This scheme is dedicated exclusively to women entrepreneurs and is run by women development corporations operating at the state level. It provides financing worth up to Rs 15 lakh for business ventures led by women. However, it is compulsory for applicants to be between 18 and 55 years of age and their annual income should be less than Rs 15 lakh.

Other alternatives for obtaining business finance without collateral

Here are some other alternatives that can be used to meet short- and medium-term financing needs:

  • Bill factoring: Self-employed professionals that have already built up a clientele can endorse their bills receivable to a bank or financial institution at a discount. Under this arrangement, the responsibility for claiming payment from the original buyer (debtor) shifts to the bank. With bill factoring, pending bills can be easily leveraged to meet immediate working capital requirements.
     
  • Peer-to-peer (P2P) lending: Crowdfunding is a viable alternative for business owners who are otherwise not eligible for a bank loan. With P2P lending, a business can raise funds from interested investors by pitching its proposals on select online platforms. Prospective investors are free to evaluate the proposal and decide whether or not to fund it. The interest rate and other terms and conditions are set by the online platform. This method can be particularly useful for entrepreneurs with a poor credit score as they can get the funds they need based purely on the viability and potential of their idea. 5 Myths about starting a small business that women need to stop believing