Many startups lose new opportunities due to a lack of funding. So, they turn to banks and other financial institutions for fulfilling their financial needs. Collateral free loans (also known as Unsecured loans) are funding where loans are given without submitting any security/guarantee with the banks. These loans are given to applicants based on their income, creditworthiness, and business performance. The interest rate of such loans will be higher when compared to secured loans. Address proof, ID proof, age proof, passport size photo, signature, IT returns, income statement, bank statement, financial statements audited by CA are some of the documents required for getting unsecured startup loans.
Qualification for collateral-free loans:
- The applicant should be age between 21 to 65 years.
- Applicant should have a CIBIL score of 750 or more.
- The business should be operational for at least two years.
- The business’s annual income should be a minimum of INR 2 lakhs (turnover should not exceed INR 25 crore).
- The applicant should be an Indian citizen with no criminal record or previous defaults from any financial institution.
- The startup should have a feasible business plan, and innovative products should be provided.
- The business should get approval from the Department of Industrial Policy and Promotion(DIPD).
Types of Collateral free loans for startups
1. Unsecured Term Loans:
Term loans are long-term loans availed for a specific time duration (generally 1-10 years) and are repaid in the form of EMIs. These loans are used for business expansion or growth, new product launch, purchase of machinery and equipment, construction of buildings, offices.
2. Unsecured Working capital loans:
As the term suggests, there is no need to pledge assets as security. Working capital loans are availed for a short period for meeting day today business expenses such as inventory financing, rent payment, salary to employees. The loan is repaid within one year of acquiring it.
3. Unsecured Line of Credit:
An unsecured line of credit is also known as a revolving line of credit. Banking and non-banking institutions offer only a predetermined amount of funds or funds up to a limit at higher interest rates (since lending funds without collateral security are riskier for the lender). However, as a startup, they may require quick and recurring funding, so business lines of credit can be the best startup loan without a collateral requirement. One major advantage is that startups don’t have to pay interest on the borrowed amount for the first 9-15 months. To get this loan approved, startups need to prove that they have good personal and business credit scores and revenue history.
4. Business Credit Cards:
Business credit cards are one of the cost-effective funding tools for startups. It provides short-term cash flow with credit limits. It helps earn rewards like cash back, preferred pricing, airline miles, and more like a personal credit card. Further, it helps to manage business finances through record-keeping. All you need is a good CIBIL score to access these cards. Some of the best available unsecured business credit cards include Capital One Spark Classic, Capital One Spark Miles, The Blue Business Plus, Chase Ink Business Cash.
5. Merchant cash advances:
Merchant cash advances are also known as Cash Advance Loans. It provides a lump sum of funds for your business growth in exchange for daily credit card/debit card sales. It is the most expensive unsecured startup loan in the market because it accepts businesses having poor or limited credit scores.
6. Equipment financing:
If you require expensive equipment for your startup, equipment financing will be a better option. Here the equipment bought at the time of starting the business acts as a security for the loan. Once the startup earns revenue, the customer can repay the amount either through lump sum or monthly instalments. In case of non-payment, lender can seize the equipment to recover his losses. Thus, Equipment financing helps you to set up and finance machinery/equipment purchases.
Unsecured loans under Government Schemes
1. Credit Guarantee Scheme:
Credit Guarantee Fund Trust For Micro and Small Enterprises headed this scheme. The government initiated this scheme to facilitate the flow of credit to MSEs engaged in manufacturing or service activities. Startup enterprises are majorly benefitted under this scheme. It allows startups to take loans at a reasonable rate of interest. The maximum limit of a loan is one crore, and the loan amount depends on the eligibility and viability of the business. The lending institutions include Commercial banks, Private and Public banks, Foreign banks, Regional Rural Banks, SBI, and its associated banks under NABARD.
2. Pradhan Mantri Mudra Yojana(PMMY):
This scheme was launched in 2015, and it is headed by MUDRA that stands for Micro Units Development and Refinance Agency. It grants funds to micro units and non-cooperative small business sectors. The interest rate varies from bank to bank, and there are no minimum loan amount criteria. This scheme is again classified into three categories:
- Shishu scheme: This scheme is primarily for startups providing loans up to 50,000.
- Kishor scheme: The loan offered ranges from 50,000 to 5 lakhs.
- Tarun scheme: The loan offered ranges from 5 lakhs to 10 lakhs.
Both Kishor and Tarun schemes are designed for different business stages and funding needs.
3. Standup India Scheme:
This scheme provides grants to women entrepreneurs and people under the category of SC/ST. The loan amount ranges from 10 lakh to 1 crore and should be repaid within seven years.
4. Bank Credit Facilitation Scheme:
This scheme was headed by the National Small Industries Corporation(NSLC) to provide credit requirements of MSMEs units. The loan repayment tenure depends on the startup’s income, ranging from 5-7 years, and in some cases, it can be extended up to 11 years.
5. Coir Udyami Yojna:
This scheme is initiated by the Coir Board that aims to support coir units. It provides loans to project-based businesses with a flexible interest rate having a maximum period of 7 years. However, startups that have already assisted Government subsidy under any Indian or State Government scheme cannot benefit from this scheme.
Startups have a tougher time in obtaining funding. They seek unsecured loans from banks, financial institutions, and Government as funding sources because they may have no or little assets to be pledged at the beginning stage. Are you a startup? Let us know about your funding sources. If you haven’t already, get started with Scaalex to take advantage of getting the best investors for funding.