Steps To Getting A Small Business Loan Without Collateral

Starting a small business or a startup can be a challenging task, even if your business idea is great and the future looks bright. One of the biggest hurdles entrepreneurs face is securing adequate funding to turn their ideas into reality. Whether it's for covering unexpected expenses, buying new equipment, or financing expansion projects, having access to the necessary funds is crucial to the success of your venture. 

A small business loan is one solution to this challenge, providing you with the financial resources needed to grow and thrive. By offering flexible and customisable funding options, a small business loan can help you overcome the financial obstacles that stand in the way of realising your business vision.  

That said, a small business loan can provide you with the necessary financing, but the requirement of collateral can be a major concern for some owners. By providing collateral, such as a portion of the business or equipment, owners put their assets at risk in case of default. However, for those who prefer not to use collateral, there are alternative options for collateral-free loans. These options can provide the necessary funding without putting the business or assets at risk.  

What Are Collateral-Free Loans 

A collateral is a security or an item of value that is used to guarantee the repayment of a loan. It is pledged by the borrower to the lender as a form of assurance that the loan will be repaid. If the borrower fails to repay the loan, the lender has the right to seize the collateral and retain it as compensation for the unpaid debt. On the other hand, if the borrower successfully repays the loan, the collateral is returned to them.  

That said, collateral-free small business loan loans do not require the borrower to provide any form of security or collateral to the lender. Instead, the lender relies on the borrower's current income, financial stability, and the viability of their business to assess their ability to repay the loan. This makes them a suitable option for those who are just starting out or those who need a loan but do not want to put their assets at risk. 

They offer working capital for purchasing equipment, hiring employees, or expanding operations, without the need for any assets as security against the credit. This type of loan is favoured for its simple documentation, flexible repayment terms, low interest rates, and fast approval process. By making timely repayments, the borrower can also establish a positive credit history. 

How To Get Collateral-Free Loans 

The government acknowledges the vital role that small businesses and startups play in fueling economic progress and creating job prospects. To support the sector, the government has introduced several collateral-free small business loan schemes tailored to the needs of small businesses and startups. These initiatives are aimed at providing access to hassle-free credit facilities. 

1: Pradhan Mantri Mudra Yojna 

The Pradhan Mantri Mudra Yojana (PMMY) is an initiative launched by the government to provide collateral-free small business loans to micro and small enterprises. The PMMY is further divided into three categories: Shishu, Kishor, and Tarun. 

• Shishu: The Shishu loan is aimed at business start-ups that require lesser funds. It provides loan amounts up to ₹50,000. 

• Kishor: The Kishor scheme offers loans from ₹50,000 to ₹5 Lakhs, and is best suited for businesses in their growth phase. 

• Tarun: The Tarun category provides loans up to ₹10 Lakhs, ideal for businesses requiring a higher level of funding. 

2: Stand Up India Scheme 

The Stand Up India initiative is a program launched by the Government of India to empower women and the members of Scheduled Caste and Scheduled Tribe (SC & ST). The scheme offers business loans for women and SC & ST community. The scheme provides bank loans in the range of ₹10 Lakhs to ₹1 Crore, without the need for collateral. This loan is offered to at least one SC or ST member and one female per bank branch for establishing a new enterprise. For non-individual enterprises, it is mandatory that either an SC or ST member and/or a female entrepreneur holds at least 51% of the shareholding and controlling stakes. 

3: Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGFSMSE)  

The Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGFSMSE) is another initiative introduced by the Government that offers collateral-free loans. These loans are offered to the micro and small enterprise sector. It empowers and supports business owners who are underprivileged and underserved. However, the amount of small business loan sanctioned to an individual under this scheme is based on his eligibility and feasibility of the business. The maximum loan amount available in the CGFSMSE is ₹2 Crores per business. 

4: Coir Udyami Yojna 

This is a flagship program from the Coir Board of India that provides support to micro and small-scale enterprises in the coir sector. The credit-linked subsidy scheme aims to assist entrepreneurs in establishing coir manufacturing units with small business loans. Under this scheme, the Government funds the project cost of up to ₹10 Lakhs, along with a single cycle of working capital. The program mandates that the total funds provided should not exceed 25% of the project cost. Loans under the scheme are provided without the need for collateral or a third-party guarantee, making it accessible to a wider range of entrepreneurs. 

Eligibility Criteria for Collateral-Free Loan 

Collateral-free small business loans are granted to applicants who meet the necessary eligibility criteria. Although requirements may differ, the basic qualifications for obtaining this type of loan are as follows: 

Citizenship: Indian citizenship is a requirement for collateral-free small business loan eligibility, and the applicant has to provide mandatory government-issued ID. 

Age: The applicant must be at least 21 years of age at the time of application and not older than 65 years at the end of the loan repayment tenure. 

Credit Score: Good credit score of 750 and above is required for loan approval as it indicates low-risk borrower and likelihood of loan repayment on time. 

Income: The minimum business turnover should be at least ₹10 Lakhs to ensure the financial capability  for timely loan repayment. 

Experience: The applicant must have a minimum of 5 years of work experience, with a minimum of 3 years in the same industry, to demonstrate stability in their background. 

Self Employment: To be eligible, you must hold a position as a self-employed owner, partner, or director on the board. 

Profitability: The business owner must demonstrate a minimum of 2 years of profitability of his firm, as this indicates its financial stability. 

Documents Required for Collateral-Free Loans 

When applying for a small business loan, it is important to have all necessary documentation in order to ensure a smooth and efficient application process. These documents include: 

• Application form: Completely filled-out application form along with passport-size photographs 

• KYC (Know Your Customer) Documents: KYC documents include PAN card, Aadhaar card, Driving Licence, Passport, Voter ID card and Utility Bills. 

• Business Registration Certificate 

• Other Required Documents (as per lender's requirements) 

How To Apply for Small Business Loan 

Getting a small business loan has become convenient in recent times because of the online processing of loans by lending platforms. All you need to do is to apply for the loan, and submit all the necessary documents. The approval process can be done completely online, so you don't have to visit the bank branch in person. Once your loan application is approved, the funds will be transferred directly to your account. 

In conclusion, collateral free business loans are an excellent resource for small business owners who do not want to put their assets at risk. Also, these loans are a viable option for individuals who have a strong business concept but do not have the necessary credit to fund their dreams. 

If you are considering a collateral-free loan, it is important to thoroughly research your options. You should also carefully review all government initiatives that may be available to support your business. It will help ensure that you get the financial assistance you need to grow and succeed.