India’s business landscape is changing, and with the respected Prime Minister’s goal of “Aatmanirbhar Bharat”, there are many startups in India with unique ideas that have started working towards this goal; however, not all startups have enough collateral to risk when it comes to taking a Startup Loan India against collateral. Collateral-free business loan means it is an unsecured loan for new businesses that do not have to pledge any assets, such as property, equipment, etc, to get a loan.
Let’s explore how you can find a financier or new business funding for your dream venture without pledging any personal collateral.
What Are Collateral-Free Startup Loans?
A collateral-free business loan or commonly known as an unsecured loan, is a type of loan where the borrower does not have to attach their personal asset or any business equipment to get a loan against it. It is unlike the traditional loans, where the borrower has to attach their asset as security with the lender to get approval for a Startup loan India.
Best Ways to Get a Startup Loan Without Collateral
You can get startup loans without collateral through various government schemes like MUDRA and Start-Up India, which willingly offer collateral-free business loans up to INR 10 lakhs and INR 1 Crore, respectively. Below mentioned are these government schemes:
(a) Government Schemes for Startups
- Pradhan Mantri Mudra Yojana (PMMY): Under this government scheme, the borrowers have a limit of INR 10 lakhs without attaching any collateral. This loan is applicable for those non-farm sectors like manufacturing, trading and services. The benefits under this scheme are that you receive low interest rates with a 5-year repayment as a minimum period and minimal processing fees.
- Stand-Up India: It is a support for the entrepreneurs by providing loans between INR 10 Lakhs to INR 1 crore for greenfield enterprises with a focus on SC/ST and women entrepreneurs.
- SIDBI Initiatives: SIDBI stands for Small Industries Development Bank of India, which provides support to MSMEs through various programs. One such program is the SIDBI Fund of Funds scheme, which provides risk capital to startups.
(b) NBFCs & Fintech Lenders
- Modern Lenders: There are many modern companies that are offering collateral-free loans through a fast, online application process. This is ideal for businesses that are seeking quick access to capital, often with less documentation.
- Online process and quick approval: The online process for these lenders is very streamlined, as it makes it easy to apply and get quick approval as compared to traditional bank loans.
(c) Business Credit Cards or Overdraft Facilities
- Short-term financing: The business credit cards or the overdraft facilities can be used smartly for short-term financing needs only. This allows you to use funds as needed and also repay them quickly while also avoiding long-term interest payments.
(d) Revenue-Based or Venture Debt Funding
- For revenue-generating or investor-backed startups: The startups with a consistent revenue stream or backing from investors can raise debt financing based on the future income rather than their assets.
- Venture Debt: It is a type of loan that is specifically structured for venture-backed startups, where the lenders provide capital based on the company’s growth potential rather than collateral.
How to Improve Your Loan Approval Chances
With the following factors, you can improve your loan approval chances:
- Start by maintaining a good CIBIL score, which is above 700+.
- To convince the investors, make a very engaging and interesting business plan.
- All of your financial records should be clean and transparent.
- Show steady cash flow or early traction
- Ensure that you are not applying to multiple loan lenders simultaneously.
Step-by-Step Process to Apply
Here is step-by-step guide on how you can apply for new business funding:
- Research about the suitable lenders or schemes.
- Check all the eligibility criteria & documents.
- Prepare your business plan wisely and smartly.
- Apply online or offline.
- Get verification & approval.
Comparison between Collateral-free business Loan and the traditional secured loan
| Features | Collateral-Free Loan (Unsecured Loan) | Traditional Secured Loan |
| Collateral | Not Required | Required. E.g. personal assets or machinery. |
| Risk for Lender | Higher | Lower |
| Interest Rates | Generally Higher | Generally Lower |
| Loan Amounts | Typically smaller | Can have huge amounts |
| Repayment Period | Often Shorter | Often Longer |
| Paperwork | Generally has less paperwork | Includes more paperwork |
| Default risk | No risk of losing collateral | High risk of losing the pledged asset. |
| Best For | It is best for businesses that need quick cash, newer businesses or those who want to avoid risking assets. | It is best for already established businesses with assets that are willing to pledge, seeking larger sums or lower costs. |
Why is a Collateral-free Business loan ideal for new startups with limited assets?
Collateral-free business loan is the perfect option for those startup owners who have limited assets because this kind of loan helps in removing the risk of losing personal assets or any business assets if the loan cannot be repaid. These loans are also quicker to be approved, involve a minimal documentation process in comparison to traditional loans, and make it easier for startups to access the funds needed for various purposes.
Why are lenders more open to Collateral-free business loans today (government initiatives, fintech innovation, etc.)?
Lenders have become more open to collateral-free business loans today because there are government initiatives like the CGTMSE scheme in India, which provides full credit guarantees to banks of the reduced risks. Moreover, the constant growth of fintech and the data-driven lending models allows lenders to assess a borrower’s creditworthiness through alternative data, such as real-time transaction history, rather than completely depending on collateral. Through this approach, it makes it easier to fund startups and small businesses that lack traditional assets.
Eligibility & Key documents required for a Collateral-free business loan
The eligibility criteria for new business funding are given below:
| Factor | Typical Requirement |
| Age | 24 to 80 years |
| Credit Score | 685 or even higher |
| Business Tenure | 3 years |
| Nationality | Indian |
The important documents needed for applying for this loan are as follows:
- The KYC documents like the Aadhar card, passport or the voter’s ID.
- PAN CARD
- Proof of business ownership
- Other required or asked financial documents.
Pros and Cons of Collateral-Free Loans
| Pros | Cons |
| No asset risk | Slightly higher interest rates |
| Fast approval | Smaller loan size |
| Great for new entrepreneurs | Strong credit needed |
Collateral-free business loans are beneficial for New business funding and startups in India. It also includes the factor that you maintain your monthly payments and maintain a good CIBIL score.
Conclusion
Having an idea in mind for a startup, but you do not have new business funding due to a lack of collateral, then you do not have to worry, as there are many government schemes and other lenders who have been willingly offering collateral-free business loans to borrowers.
Through this article, you must have known what the schemes, the eligibility criteria, etc for applying for a collateral-free business loan. Therefore, always do your research first and then apply for loans.
If you are looking for a financier, or you are confused with a lot of options, you can come to GoFinance. GoFinance will provide you with consultations and all the services needed to finance your business.
