Obtaining Collateral Free Loan in India

The Credit Guarantee Fund Trust for Micro and Small Enterprises Scheme (CGTMSE Scheme) provides a framework for Entrepreneurs to obtain a collateral-free loan in India. However, many of the Entrepreneurs starting a Business in India find it hard to obtain a collateral-free loan under the CGTMSE scheme due to a lack of understanding of Banking Principle and Practices. In this article, we provide practical tips for availing a collateral-free loan from banks under the CGTMSE Scheme.

Tip #1: Prepare a Detailed Project Report or Business Plan

One of the main challenges for any Entrepreneur is raising funds and keep the business funded. For raising loans from Banks or equity from investors, one of the vital tool or document is a well crafted detailed project report or a business plan. A detailed project report is essential for a bank credit officer to understand the business model, projected cash flows and appraise the request for the loan. A well-thought-out project report would prove to the credit appraiser that you are serious about the business idea and is well planned. Therefore, preparing a detailed project report or business plan is the first step in obtaining a collateral-free loan in India.

Tip#2: Ensure your request is Bankable

While drafting the project report and while making the request to the banker for a loan under the CGTMSE scheme, ensure your request is bankable and within the banking framework. Banks norms in India does not currently allow for loans which will be used for Research & Development, creation of intangible assets or marketing expenses. Therefore, the request for CGTMSE loan must preferably be backed by a business plan that involves capital asset creation by way of term loan and working capital facility, which will be used for building current assets.

Also, entities like Private Limited Company or Limited Liability Partnership, enjoy easier access to credit or equity infusion when compared to a Proprietorship or Partnership. Therefore, it is advisable to incorporate a business entity and make the request in the name of the entity.

Tip#3: Choose the right Bank and Branch

Loans under the CGTMSE scheme are considered riskier than loans backed by immovable assets. So, small and regional banks are more averse to sanctioning loans under the CGTMSE scheme when compared to large nationalized banks. Entrepreneurs must network with other business owners enjoying loan under the CGTMSE scheme and determine a good bank and branch for making the loan application. A good bank and branch selection while making the loan application will play a large part in the loan sanction process and determine the success of the proposal.

Tip #4: Build a Rapport and Ensure the Banker understands your Business

CGTMSE schemes are solely on the Entrepreneurs experience, skill and ability to run a successful business. So, the Entrepreneur must build a rapport with the Banker and ensure he/she understand the business model and believes the vision of the promoter. Entrepreneurs applying for a loan under the CGTMSE scheme must, therefore, build a strong relationship with the Banker.

Tip #5: Be Patient

The loan appraisal and sanctioning process could take anywhere between 1-3 or more months in India. Hence, the Entrepreneur must plan ahead and be patient through the loan processing period. The Banker could interpret on showing haste or anxiousness during the loan processing period as signs of lack of financial discipline and planning.

CGTMSE Scheme Overview

The CGTMSE Scheme provides a framework for entrepreneurs, small scale industries and medium-sized enterprises to obtain a loan of up to Rs.1 crore without any collateral in India. Many of the Banks in India actively provide collateral-free loans under the CGTMSE Scheme in India. The applicant can avail the benefits of the scheme with an application in the correct format within the framework. More information about CGTMSE Scheme and the list of banks providing loan under the CGTMSE scheme can found in another article titled Loan without Collateral in India.