MSMEs and SMEs in India, although contributing to one-third of the country’s GDP, suffer mainly because of funding constraints. Reports suggest that less than 5% of small businesses receive formal credit while others have to depend on informal funding sources.
The primary reason behind it is that most small businesses cannot always afford a high-maintenance loan, i.e., the one available against security and high interest rate, to meet their funding requirements.
Conversely, many financial institutions in the country are also reluctant to offer a considerable lump sum as loan without any collateral, simply because of the risks associated with it. Hence, they demand collateral that small business owners cannot always provide.
In such a scenario, the government and some financial institutions, typically NBFCs, have introduced several schemes to provide collateral free loans to businesses.
Collateral-Free Financing Options For Businesses
One of the first stepping stones towards the success of a venture is gathering a clear idea about how to organize finances for the business. Most MSMEs run under a tight budget or insufficient funds. In such cases, business owners can opt for a working capital loan or similar other collateral free loan options to fulfil their business funding needs.
Following are some of the business loan options that are collateral-free and offer substantial loan amounts against nominal interest rates.
- Equipment and machinery loan – Some lenders provide collateral;-free machinery loans to enable businesses purchase a new machinery or equipment or replace an existing one. Such loans are popular mostly among individuals who need financing to optimise or expand their existing business.
Such loans are available without any security, and also facilitate flexible repayment of the advance over an extended tenor. Business owners can avail these advances against minimum eligibility and documents.
- Loans under the Credit Guarantee Scheme (CGS) – These particular collateral free loans are available for MSMEs particularly involved in the service and manufacturing sectors. Availing this loan, MSMEs can get a cover of up to 85% of the required credit facility, up to a maximum of Rs. 5 lakh. The repayment of this loan is equally attractive as it comes with extended tenor.
- Mudra Loan – Under the aegis of the PMMY scheme, this unsecured business loan is available up to a limit of Rs. 10 lakh and caters to the non-corporate small businesses. Classified under the tarun, kishor and shishu categories, it can prove to be an excellent option to those seeking collateral free loans for MSME.
- Credit Linked Capital Subsidy to Upgrade Technology – Individuals who need to revamp their technical equipment or to buy new inventory or machines to modernise operations, can avail this loan. It offers a subsidy of almost 15% of the total credit facility against zero collateral.
- SIDBI Make in India Soft Loan for MSMEs – It is a term loan available against simple terms, which helps MSMEs raise the necessary finance for business growth. This loan can be used for expansion of existing business as well as for start-ups. The repayment can also be made conveniently over a tenor of up to 7 years.
- MSME loans – Offered typically by NBFCs, these loans aim to provide collateral-free financing to medium and small scale enterprises against nominal rates. These collateral free loans for MSME also come with quick approval and disbursal facility, making them one of the most accessible unsecured advances.
Moreover, NBFCs like Bajaj Finserv also extend pre-approved offers that facilitate a hassle-free loan approval experience within minimum time. Such offers are available for various collateral free loans, including business loans and personal loans. You can check your pre-approved offer simply by submitting your name and contact number.
- Loans under the Stand Up India scheme – Financial assistance under this scheme is provided to manufacturing, trading and service enterprises. However, in the case of non-individual organizations, SC/ST and women borrowers are given priority. To date, over 3,400 online loan applications has been sanctioned through the Stand Up India initiative.
These are some lucrative collateral free loans that business owners can avail to continue their business endeavours. They also can follow some useful tips to responsibly pay off their small business loans and manage their finances effectively.