Business credit

How to get startup business loan without collateral in India?

Apr 05, 2024

Seeing an idea growing into a successful startup is a dream for many entrepreneurs. One of the foremost challenges that can hinder this transition is obtaining a startup business loan without collateral.

When the startup is still small and not making any profit, it can be hard for them to submit collaterals as security to get loans from banks. It is a big concern for entrepreneurs to put their property or savings at stake to grow their business.

For this reason, no collateral business loans are gaining popularity in the Indian startup market. Though there are 1000s of providers providing a collateral-free business loan for startups in India, is it safe? How to apply for and acquire a startup business loan without collateral in India?

What is a collateral free business loan for startups?

Collateral means assets, properties, tangible possessions, or valuables kept as security by finance institutions while providing loans.

When banks provide a loan to their customer, they expect some kind of security source from the borrower. If the borrower doesn’t repay the money on time, the lender has the legal right to seize the collateral. 

In recent times, many banks and financial institutions have started offering no collateral business loans where they don’t expect any guarantee source. They are not just offered for small businesses but other expenses management like education, wedding, home renovation, etc.

To qualify for a startup business loan without collateral, you will have to meet certain eligibility criteria. Yet, they are easy to obtain and have low documentation procedures.

Related read - How to raise capital for a startup in India?

What are the business loans available without collateral?

To encourage more independent entrepreneurs to pursue their dreams, the Indian government has facilitated many a collateral-free business loan for startups.

Following are some of the schemes that startups can apply for.

1. MUDRA Loan under PMMY

Started with the motto ‘fund the unfunded’, this scheme was launched by the prime minister to provide no collateral business loans up to INR 10 lakh.

This scheme benefits only non-corporate, micro, and small businesses. To obtain this lending, startup owners can approach commercial or small finance banks or apply through their website.

There are three different schemes based on the maximum funds sanctioned. 

Shishu - Funds up to INR 50,000, which you should repay within five years at 1% of monthly chargeable interest.

Kishore - Funds available from INR 50,000 to INR 5,00,000

Tarun - Funds available from INR 5,00,000 to INR10,00,000

The Mudra loan scheme doesn’t require any collateral.

There are many cottage and small-scale industries which have seen their full potential in the short term due to their low interest and flexible repayment tenure.

The eligible amount and scheme (Shishu, Kishore, and Tarun) will be decided based on the stage of the business and its funding requirements.

2. Stand-Up India Scheme

Stand-up India is a scheme designed by the Indian government to provide financial assistance to women business aspirants and people from scheduled communities.

The loan amount range is INR 10 lakh to INR 1 crore.

Each bank branch must sanction this loan to one woman entrepreneur and one borrower from the scheduled caste or scheduled tribe communities. Another important eligibility is that the age of applier should be above 18 years old.

If the borrower is an institution, then the eligible borrower must hold 51% or above of stocks/controlling authority.

The interest rate depends on the branch from which the borrower lends the loan. To avail of this no collateral business loan, you can apply through this website or contact the nearest bank branch.

This loan can be obtained with or without collateral. If you cannot provide a security source, you must produce the CGSFIL guarantee if the bank demands it.

3. Credit Guarantee Scheme

This scheme is run by the Indian government and the small industries development bank of India. Together they help new and existing startups in India to obtain a business loan without collateral for their business expansion.

Both current and new startups are eligible for obtaining this collateral-free business loan for startups.

The maximum guaranteed amount the borrower can get is INR 1 crore and the repayment period is 5 years.

The borrower can apply from the government website to begin the application process. All industries, especially manufacturing and processing industries, can easily obtain no collateral business loan under this scheme. The guarantee cover available is 50%, 75%, 80%, and 85%.

Since there is no collateral involved, the lender would give more importance to the project viability. 

4. Bank Credit Facilitation Scheme

This credit assistance scheme is run by the national small industries organization to fund the small and medium-sized enterprises all over the country.

This association has joined hands with nationalized and private banks to help the MSME (Micro, Small, and Medium Enterprises) get the credit support they need from banks.

Here is how exactly they support the MSME.

• Helping them create business bank accounts or transfer the account from one bank to another.

• Helping the companies obtain a business loan without collateral and fill out their loan applications and aid in the document collection process.

• To negotiate with banks for better interest rates and flexible tenure. The repayment tenure is decided based on the revenue generated by the company. It can go from 5 years up to 11 years.

• To get a good loan rating score from the bank, they apply for the loan.

5. Coir Udyami Yojana

A combination of subsidy and loan, Coir Udyami Yojana is a scheme run by the Indian government along with the coir board to help business owners set up coir manufacturing industries.

The main motto is to encourage innovation and technological advancement in the coir industry. The maximum amount offered will be up to INR 10 lakh. To avail of the loan, interested people can directly apply from the website of the coir board. 

Any Indian citizen above 18 can apply for this subsidy plus a loan to start their coir fiber or yarn manufacturing business.

The documentation process is extensive and detailed, as the borrower must submit documents relevant to their coir industry experience and project planning.

The working capital requirement will not be considered in the loan coverage. Only the capital cost and machinery will be covered.

Interested to know more about the loans available for small businesses? Check out our article - 6 best small business loans in India

Benefits of collateral free business loans

A business loan without collateral is not just favorable for business owners. They are easier to process from the bank end as well.

Here is how they benefit everyone involved in financial aid.

Quick loan approval

Providing collaterals means more documents and documentation. They can take longer to verify for the banks. Any problem in the submitted documents requires both parties to communicate and circle back to the process.

Startup business loans with no collateral are simple and exist to promote the growth and development of micro-businesses. So, your approval won’t be stalled based on the security you produce.

Build credit history

A low credit score can seriously affect your business in the future by not letting you collaborate with financial institutions or successful vendors/investors.

No collateral business loans come with flexible repayment plans, and tenure is generally long. Since this is an unsecured loan, the only parameter that the banks weigh is your credit score.

Even if you don’t have one, you can pay your loans on time without delay and build good credit history

Have flexible payment options

Modern financial institutions that lend a business loan without collateral often provide flexible repayment options, especially for a small sum.

You can borrow whenever you have a need and repay on your own terms. This option will help manage your cash flow accordingly without affecting your credit score. 

Avoid risking your assets

If you cannot pay your dues due to unforeseen circumstances, your properties will be seized by the bank, and they will no longer be yours. There are horror stories where large corporations lost their personal and business assets to huge, unpaid loans.

Unsecured Startup business loans with no collateral are the best way to gain financial assistance without risking anything.

No collateral needed

That’s a major advantage. Usually, before requesting a loan, the borrower will analyze the value of their asset and calculate how much they will be qualified to obtain. 

Startup business loans with no collateral make the whole loan process hassle-free, and it's your project requirement that decides how much you can acquire. Even if you have personal/business assets, they will be free from insecurities and risks.

As we discussed, there are various government schemes and financial institutions that offer such loans, catering to different funding needs and eligibility criteria.

The advantages of these loans include quick approval, the opportunity to build credit history, flexible payment options, risk mitigation by avoiding collateral requirements, and the ability to acquire funds based on project requirements.

Overall, collateral-free business loans contribute to the growth and development of startups by providing accessible funding options without compromising valuable assets.

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FAQs on startup loans

What do I need to get a startup business loan?

Generally, a loan provider would need collateral against providing a loan. But there are many collateral free loans available for startups as well. For these type of loans, all you would need to show are your financial statements and credit score.

How does a business line of credit work?

A business credit line works similar to a credit card. A certain amount is lent to a business to spend every month. This amount must be repaid by the business to the lender as per the due date on the agreed terms and conditions of the credit line.

Who is eligible for start-up loan?

Depending on the loan provider, you will come across different eligibility criteria for getting a startup loan. Usually, providers assess each business individually to determine whether they are creditworthy or not.