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Even if your business idea is fantastic and the future appears promising, starting a small business or startup can be difficult. Finding sufficient finance to make their ideas a reality is one of the main challenges faced by entrepreneurs. Having access to the required finances is essential for your business’ performance, whether it’s for funding expansion projects, new equipment purchases, or covering unforeseen costs.

One way to overcome this difficulty is to obtain a small business loan, which will give you access to the capital required for expansion and success. A small business loan can assist you in overcoming the financial challenges that prevent you from realizing your company’s mission by providing flexible and adaptable finance solutions.

Having said that, a small business loan can give you the funding you need, but some business owners may have serious concerns about the necessity for collateral. Owners put their assets at risk by offering collateral, such as a share of the business or equipment, in the event of default. There are other choices for collateral-free loans available for people who would prefer not to use them. These choices can supply the required capital without placing the company or assets at risk.

Collateral-Free Loans

A security or valuable asset is used as collateral to ensure the repayment of a loan. It serves as a guarantee from the borrower to the lender that the loan will be paid back. The lender has the right to take possession of the collateral and keep it as payment for the overdue debt if the borrower defaults on the loan. On the other side, the collateral is given back to the borrower if they successfully repay the loan.

Having said that, collateral-free small business loans do not call for the borrower to give the lender any kind of security or collateral. Instead, the lender bases its determination of the borrower’s ability to repay the loan on the borrower’s present income, financial stability, and the viability of their business. Because of this, they are a good choice for people who are just starting out or who need a loan but do not want to risk their assets.

Without the necessity for any assets to serve as security against the credit, they provide operating cash for the purchase of equipment, the hire of personnel, or the expansion of businesses. This kind of loan is preferred because to its straightforward documentation requirements, adaptable payback terms, low interest rates, and quick approval procedure. The borrower can build a solid credit history by making on-time repayments.

The government recognizes the critical contribution that startups and small enterprises make to driving economic growth and opening up job opportunities. The government has created a number of small business loan programs without collateral that are suited to the needs of startups and small businesses in order to boost the industry. These programs are designed to make it easier to get financial 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.

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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) 

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