The word collateral implies the guaranteeing of something against a loan taken. You could pledge your home, commercial premises, an expensive car or even some jewellery for a loan given to you by a bank or a money lender. A collateral-free loan is unique in its nature because you can procure for your business from a financial institution, bank or money lender without having to pledge any of your fixed or other assets. Some of the assets which are considered as collateral include vehicles, gold, savings certificates, property, deposits as well as bonds. Vehicles that are more than five to seven years old do not qualify as collateral. Any asset that you pledge has to be of considerable value in accordance with the loan you wish to take. A collateral-free loan is provided on the premise of a specific rate of interest and can be applied for by individuals as well as businesses. Several individuals apply for collateral loans for varied reasons. Some of these include wedding expenditures for children and higher studies abroad for children. Young adults aspiring for higher studies abroad also apply for collateral loans. However, like most financial borrowings, a collateral-free business loan also comes with its limitations as far as the amount is concerned.
Did you know? Inventory, farm products, equipment, consumer goods, and property on paper are accepted collaterals to procure a collateral-free loan if their value is in accordance with the finance required.
Deep-Diving Into the World of a Collateral-Free Loan
Let us first understand the various features that constitute collateral-free loans. These power-packed loans include the following aspects:
- According to the micro, small and medium enterprises development act of 2006, all mid-size businesses can avail of loans amounting to ₹1 crore.
- Mid-size business enterprises which are operational, as well as the new ones, can avail of such loans.
- Those desirous of very large amounts will require collaterals. This varies across the applicants and is dependent on the various details of their business.
- The interest rates vary across banks though they are often charged according to the prevailing base rate.
- The guarantee cover requirement for such loans is 75%, 80% and 85%.
Who Needs a Collateral Free Loan?
There are various categories of individuals who require a collateral-free loan. Some of these include families who are keen to send their children abroad for higher studies. There are others who need loans to meet their individual medical expenses. Some individuals require such loans for making timely payments to their employees, while others require them for the renovation of their commercial premises or even homes. More often than not, Founders or entrepreneurs of micro, small as well as medium enterprises (MSME) apply for collateral-free loans. Most of these organisations are proved to be ineligible in their application for such loans. The procedures involved in applying for bank loans are known to be tedious. Under these circumstances, businesses choose to approach other finance-lending entities to ease their requirements of finance. collateral-free loans have proved to be very advantageous to such businesses. The reasons for this are given below:
- The rates of interest are not too steep but competitive.
- The conditions underlying the repayment of the loans are flexible and are applicable up to 5 years after procuring the loan.
- You don’t have to provide a constant progressive report.
- The documents required include proof of your business registration certificate, income, and your personal details like Aadhar and PAN cards, passport, voter id, as well as your driving license if you have one.
- No collateral guarantee is demanded.
- You are not questioned on your credit score.
- The applications furnished by the businesses are processed speedily.
The eligibility criteria for procuring a collateral-free loan include the following:
- You have to be an Indian citizen.
- You should be in the age group of 18-65 years.
- If you are a business owner, your business should not be older than five years.
- You require to furnish approval from the department of industrial policy and promotion (DIPP).
- You also need to furnish a patron guarantee. This is given by the Indian patent and trademark department.
Key Considerations Before Applying for a Collateral Free Loan
- Draw a parallel between the various offerings of different finance lenders. Scrutinise the minute details like charges involved, tenure, amount and above all, the interest rate.
- Don’t get lured by low-interest rates. Make a proper analysis, and understand the terms and conditions before you make a decision.
Understanding the Public Collateral Free Loan Schemes
The government of India has, in the recent past, introduced many interesting loan facilities to encourage small and medium-sized businesses to avail of loans without collateral. The details of these are listed below:
Credit Guarantee Fund Scheme:
The credit guarantee fund trust for micro and small enterprises (CGTMSE) has systematically organised collateral-free loans for micro, small, and medium enterprises. A rural, regional, and even a scheduled commercial bank can enrol itself as a leading authority and get associated with this scheme. This CGTMSE scheme offers loans amounting to ₹10 lakhs without collateral. In case of loans exceeding ₹10 lakhs and extending to an amount of ₹1 crore, the primary security will be covered under this scheme. This could involve a mortgage of a building as well as land.
MSME Loan Scheme:
This scheme was launched by the Indian government to ease the requirement for working capital in micro, small and medium-sized enterprises. The amount of loan extends to a maximum of ₹1 crore and can be availed of by existing and new businesses. While it takes only an hour to approve or disapprove an application, the processing of the loan application is done speedily and takes about 8-12 days only. A 3% reservation is made for women entrepreneurs under this scheme, and the processing of the loan approval is comparatively easy.
The Micro-Units Development and Refinance Agency (MUDRA) scheme is ideal for business entities in the service, manufacturing, and trading sectors. You can apply for loans at various banks, namely small banks, private and public sector banks, cooperative societies, as well as scheduled commercial banks. This scheme allows a business entity to apply for a loan under three different categories of loans which are:
Shishu – Amount limited to ₹50,000
Kishor – Amount limited to ₹5 lakhs
Tarun – Amount limited to ₹10 lakhs
In 1990, the small industries development bank of India (SIDBI) was established to meet the financial requirements of businesses which are under the purview of the Ministry of micro, small, and medium-sized enterprises (MSME). The amount of loans offered by this bank is in the range of ₹10 lakhs and ₹25 crores. The loan tenure in some cases is extended to ten years. A loan amount extending up to ₹1 crore does not necessitate collateral. The said MSMEs could procure loans for buying new equipment to enhance productivity. However, the eligibility requirements, amount of the loan as well as tenure of the loan vary across different schemes.
National Small Industries Corporation Subsidy:
This offers two benefits to micro, small, and medium-sized enterprises, namely assistance in raw materials and assistance in marketing. However, these businesses have to qualify as MSEs with a Udyog Aadhaar Memorandum to become eligible for the said NSIC subsidy. Once they qualify, the scheme offers support in the various operations to help the business enhance its production.
Credit-linked Capital Subsidy:
Businesses that are in need of funds to upgrade their technology requirements can avail of this scheme. This could apply to processes like supply chain, manufacturing, and marketing to ease costs of production. A capital subsidy of 15% is offered to all those businesses that meet the eligibility criteria under this scheme. A business which qualifies for this subsidy includes public as well as private limited organisations, partnership companies, proprietors, as well as co-operative establishments.
The above contents of this article give clarity on what a collateral-free loan entails. This article also details the eligibility criteria for the different schemes, including the public ones established by the government of India. This article helps to understand the many benefits of collateral-free loans and how they have proved to be of immense value to small, micro and medium-sized business enterprises in India.