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Collateral Free Loan

What is Collateral Free Loan?

Collateral is the security against which you can apply for a loan. For example, you offer the home documents as collateral when applying for a home loan. In case of non-payment, the lending institution can seize your home. Collateral is offered to reduce the risk for the lender. 

A collateral free loan means that a bank or financial institution lends a loan without asking for any collateral or security to limit its risk. In other words, if you are a business owner applying for a loan, you do not have to pledge anything as security with the lender. This allows MSME owners to borrow money without worrying about pledging or losing the collateral.

How to apply for a Collateral Free Loan?

Applying for a collateral free loan is easy. Here are some steps you have to follow while applying for collateral free loans:

  • You have to approach the bank or financial institution from which you are planning to take a loan. You can visit their website too.
  • Check whether you are eligible for the loan. 
  • Next, you have to fill out the application form and submit the relevant documents. 
  • If everything is in order, you will be approved for the loan in a few days.

Documents required for applying for Collateral Free Loans

You will require the following documents to apply for a collateral free loan:

  • Age proof (you should be between 22 to 60 years)
  • Business vintage proof (the business should be at least three years old)
  • Previous year’s tax returns
  • The previous year’s turnover audited and approved by a CA

Who can apply for Collateral Free Loans?

There are certain requirements for applying for collateral free loans:

  • SME (Small and Medium Enterprises) and SSI (Small Scale Industries) registered private limited companies can apply for collateral free loans
  • Collateral free loans can be taken for product development, asset purchase, etc.
  • You can purchase shares and make other investments with collateral free loans.

Salient features of Collateral Free Loans

Collateral free loans offer many features to potential applicants such as:

  • Loan availability up to INR 1 crore to MSE (micro and small enterprises) according to the MSMED Act, 2006.
  • Applicants can be both new or existing MSE owners.
  • You can apply for higher loans and they will be granted on a case-to-case basis. If the loan amount is very high, you might have to pledge collateral. However, this collateral will be of a lower percentage than the collateral of regular business loans.
  • You can apply for a term loan or working capital. 
  • Depending on the applicant’s category, you can get a margin of 75%, 80%, or 85%.

Benefits of availing Collateral Free Loans

A collateral free loan has many benefits:

  • No collateral required
  • No guarantor required
  • Low interest rates
  • Flexible repayment tenures
  • Letter of credit
  • Bill for discount up to 180 days
  • No checking of track record
  • Funding for product development
  • No obligation on repayment for a certain period
  • Quick application processing
  • Easy repayment options

What is CGTMSE Scheme?

What is CGTMSE Scheme

Banks that offer Collateral Free Loans in India

These major banks provide collateral free loans:

  • Axis Bank
  • Bank of Baroda
  • Fullerton India
  • HDFC Bank
  • ICICI Bank
  • State Bank of Hyderabad
  • State Bank of India (SBI)
  • UCO Bank

Latest updates on Collateral Free Loans from GOI

The Finance Minister, Nirmala Sitharaman, mentioned that MSMEs that require equity support will get subordinate debt. The Government of India has allotted INR 20,000 crore to the subordinate debt out of which INR 4,000 crore is allotted to the CGTMSE scheme. The funds will also provide partial credit guarantee support to the lending institutions.

These guidelines have been issued to help MSEs recover from the losses incurred during the COVID-19 period. They will ensure that MSEs get a boost and their operations will not suffer due to lesser funds.

On 13th May 2020, Finance Minister, Nirmala Sitharaman also mentioned that collateral free loans were a means to help MSMEs to their feet after the nationwide lockdown had resulted in major losses. These funds are to be considered to be a relief package to assist the Indian economy. 

FAQs on Collateral Free Loan:

Who can apply for a collateral free loan?

SME/SSI registered private limited companies can apply for a collateral free loan.

What can a collateral free loan be used for?

A collateral free loan can be used for research and development of a product, purchasing intangible assets, etc.

My company stopped operations during the COVID-19 pandemic. Can I apply for the CGTMSE Scheme to get funds for resuming operations?

Yes. If you have registered as a business under the MSME scheme, you can apply for a collateral free loan under the CGTMSE scheme.

Will I be able to get a top-up on the loan amount?

You can get an extra loan on a case-to-case basis. However, you might have to pledge collateral at a lower interest rate than normal loans.

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