In spite of their large number, MSMEs face an uphill battle when it comes to timely and sufficient financing. Traditionally, MSMEs were considered an unorganized sector with little or no financial history to show, and as a result, financial institutions like banks were hesitant due to the inherent risks involved in borrowing.
Additionally, MSMEs lacked the collateral needed to cover the loans. To make borrowing seamless for MSMEs, the Indian government has developed a number of schemes. In this blog, we’ll understand the five different ways how to get MSME loan without collateral.
MSME loans are a specific type of loan designed to provide the capital needed by businesses in the MSME sector. This comprises microenterprises, small firms, and medium-sized organizations.
A loan to an MSME without collateral implies that it is categorized as an MSME that can borrow without the need for collateral. In other words, it is an unsecured business loan for MSME. The benefits of getting MSME loans without collateral are as follows:
a) The primary advantage is that MSMEs can get collateral-free credit without offering a security or collateral such as property or personal assets.
b) An MSME loan without security can be disbursed easily and speedily with minimal paperwork.
c) Collateral-free MSME loans provide great flexibility in terms of repayment tenures, interest rates, and loan amounts.
d) It is a convenient way to launch or grow a business, with simple eligibility requirements and minimal documentation.
e) A loan can be applied and tracked from the convenience of the home.
MSMEs have unique financial needs. In case your company is registered, there are multiple advantages that come with MSME registration, including giving you access to funding that fits your requirement for collateral-free finance.
Here are some ways you can get an unsecured business loan for MSME.
Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme: The scheme is jointly set up by the Ministry of Micro, Small & Medium Enterprises, Government of India, and Small Industries Development Bank of India (SIDBI) to catalyze the flow of institutional credit to Micro & Small Enterprises (MSEs). Some of the features of the credit guarantee scheme are:
a) Working capital loans up to ₹10 lakh and term loans without collateral through the government’s CGTMSE scheme.
b) A guarantee covering up to 75% of the approved loan amount is available.
c) The coverage increases to 80% if you are a woman and live in the Northeast of India. Interest rates begin at 7.5%.
d) The loan can be used to buy assets like machinery and equipment.
e) The payback period is determined by the bank, with a maximum of ten years allowed.
Stand-Up India Scheme: The goal of the Stand-Up India scheme is to provide bank loans between ₹10 Lakh to ₹1 Crore to at least one Scheduled Caste (SC) or Scheduled Tribe (ST) women entrepreneur.
a) Qualify for Stand-Up India loans if you are a woman business owner or a member of a scheduled caste or scheduled tribe.
b) Loans should be utilized in establishing greenfield enterprises (first-time ventures) in manufacturing, services, trading, or agri-allied activities and sectors.
c) The loan has a seven-year repayment period and an interest rate of 5.5%.
Credit Linked Capital Subsidy Scheme (CLCSS): Under this MSME scheme, MSMEs are given a subsidy for modernizing and improving their enterprise by availing of credit. It promotes technological advancements within the industry.
Pradhan Mantri Mudra Yojana (PMMY): PMMY offers financial support to micro-enterprises by providing collateral-free loans via three categories: Shishu, Kishor, and Tarun. Its goal is to encourage self-employment and entrepreneurship.
Non-Banking Financial Companies: Compared to traditional banks, NBFCs, or Non-Banking Financial Companies, are complementary financial institutions. These institutions reach places the traditional banks find hard to; such as areas with low population density. Additionally, they provide financing options, including small business loans and unsecured MSME loans, that are more effective in meeting the demands of these communities.
Additionally, an unsecured business loan for MSME from NBFCs provides a number of advantages, including online application, flexible repayment plans, and comparatively cheaper interest rates. They have quicker disbursal rates, making them a preference for MSME owners.
Online platforms that facilitate business financing have become more popular in recent years. Crowdfunding is a fundraising technique where individuals, companies, or start-ups raise small amounts of money from several people, usually through online platforms. It leverages the pooled contributions from numerous individuals to finance projects, products, or causes. It is used for a variety of reasons, from launching new products to funding philanthropic efforts and creative endeavors. Crowdfunding platforms are online websites or applications that enable the collection of funds from a wide range of people for various projects, businesses, or personal needs.
Access to MSME loans through traditional banks and financial institutions has been made possible by the implementation of government schemes. These loans encompass all the features needed to serve MSMEs; however, they may have slightly stricter repayment terms. To meet the demand for MSME financing, a number of banks also provide unsecured MSME loans. So, to the query “how to get an MSME loan” sans collateral, traditional loans can be a good option.
These loans address the need for small business loans with alternatives starting as little as ₹50,000 and have easier application processes. Given that they also assist in improving credit scores, businesses looking for long-term financing might benefit from these options as well.
The loan scheme introduced by SIDBI enables MSMEs to avail loan amounts between ₹10 Lakh to ₹5 Crore in less than 59 minutes. Loans are provided by Public and Private Sector Banks (PSBs), NBFCs, and other lending institutions. To apply for a 59-minute loan, MSMEs must possess their bank statements from the last six months in addition to other requirements as prescribed. Some of the features of 59 minutes MSME loans are:
a) Loans are offered to finance working capital for MSMEs
b) The starting interest rate on offer is 8.5%.
c) The loan amount, in principle, varies between ₹ 10 Lakh to ₹5 Crore loan without collateral.
d) The loan can be used to buy machinery, invest in infrastructure development and business diversification, and more.
e) Repayment terms range from one year to fifteen years.
The applicant is connected to multiple banks through the FinTech portal. The in-principle amount of ₹ 10 Lakh and 5 Crore loan without collateral, however, is not a credit guarantee and is subject to the lending bank’s approval.
Loans for MSMEs without collateral offer several advantages to start-ups and established MSMEs. Therefore, if you need an MSME loan without collateral, your primary concern should not be about providing the collateral or security. There are several funding options for MSMEs, as mentioned above; however, it is crucial to explore all options thoroughly to understand which fits your situation best.
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