Over the last two decades, micro, small and medium-sized enterprises (MSMEs) have been driving economic growth in the country. These MSMEs play a vital role in generating employment and contributing to the overall development of the country’s economy. However, MSMEs face a monumental challenge – getting access to credit, and in particular, access to collateral-free loans. These loans are pivotal for the expansion and sustainability of such enterprises.
The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) was established in the country to address this key issue. Their establishment has offered a much-needed boost to the MSME sector, as key players, such as IIFL Finance, offer business loans to support MSMEs.
What is CGTMSE and What Does it Entail?
The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) is a flagship scheme of the Government of India, and the Small Industries Development Bank of India (SIDBI). This scheme was launched in 2000 to facilitate credit flow to the MSME sector by offering collateral-free credit guarantees to lenders. The CGTMSE has been a game-changer for MSMEs in the country, helping bridge the credit gap. Additionally, SMEs have been able to access credit without offering collateral – which is often a challenge for small businesses with limited assets.
Under this scheme, enterprises can get collateral-free credit up to Rs. 2 Crores from banks and NBFCs. The credit guarantee provided by CGTMSE covers up to 75% of the loan amount, with a maximum guarantee of Rs. 1.5 Crores. IIFL Finance business loans are collateral-free loans given to SMEs through the CGTMSE scheme. IIFL Finance business loans are provided to enterprises across sectors, including trading, manufacturing, and services. The loan amount can range from Rs. 10 Lakhs to Rs. 2 Crores, with a tenure of up to 10 years.
What are Some of the Other Schemes Offered by the Government of India?
In recent years, the Government of India has launched various schemes to provide collateral-free loans to Small Scale Industries (SSIs) and start-ups.
- MUDRA Loan under PMMY offers collateral-free loans to micro units and non-corporate small businesses. This scheme is classified into three categories – Shishu, Kishor, and Tarun.
- Stand-Up India is another scheme ideated by the government to empower SC/ST and women entrepreneurs. Banks can offer collateral-free loans ranging from Rs. 10 Lakhs to Rs. 1 Crore under this scheme. The woman or SC/ST individual must set up an enterprise in the manufacturing, service, or trading sectors.
Features of Collateral-Free Business Financing
New enterprises and pre-existing ventures can opt for collateral-free loans to either expand their services, or meet urgent credit requirements. Here are their features.
- No collateral needed: Collateral-free business financing does not require businesses to pledge their assets as collateral.
- Quick application and faster approval process: MSMEs can avail of collateral-free loans by applying for them online. The application process is quicker, as no collateral needs to be pledged, and these loans are approved faster than secured loans.
- Loans approved depending on creditworthiness: These loans are approved depending on the borrower’s creditworthiness. These include factors like their credit score, financial statements, and income.
- Shorter repayment period: Collateral-free loans come with shorter repayment periods compared to secured loans. These can range from a few months to a few years.
What are the Advantages of Collateral-Free Business Financing?
You can avail of collateral-free business financing through schemes such as CGTMSE and lenders like IIFL Finance. Such loans provide several benefits to MSMEs. Some of these advantages include:
- Easy access to credit: Businesses can avail of credit easily without pledging tangible assets as collateral. This allows small businesses to thrive, including those that may not have significant assets but have a promising business model or growth potential. Thus, collateral-free business financing provides an excellent opportunity for MSMEs to grow and realise their full potential.
- Simplified loan application process: The process is simplified and streamlined, requiring minimal documentation. This allows SMEs to apply for loans quickly, significantly reducing the administrative burden and the time required for loan processing.
- Lower risk for borrowers: Collateral-free loans reduce the risk for borrowers, as they don’t have to pledge assets as collateral. This lets SMEs operate without worrying about losing their assets in case of default, resulting in peace of mind and financial stability.
- Attractive interest rates: Lenders such as IIFL Finance offer loans at competitive interest rates, based on the CGTMSE guidelines. These rates are typically lower than those levied by traditional lenders for collateral-based loans. Thus, IIFL Finance business loans – and similar loans – are affordable and cost-effective for small businesses.
- Flexible repayment terms: Businesses can opt for a repayment schedule that aligns with their cash flow. This allows SMEs to manage their loan repayments efficiently and avoid unnecessary financial strain.
- Diverse loan products: Collateral-free business financing may include a diverse range of loan products. This includes term loans, micro loans, and personal loans. Thus, SMEs can select the type of loan that caters to their specific business needs, providing tailored financing solutions.
- Improved credit score: These collateral-free loans can also help businesses create a positive credit history and improve their credit score. By making timely payments, SMEs can enhance their creditworthiness, and avail of different loans easily in the future.
- Supporting entrepreneurship and empowerment of small businesses: Collateral-free business financing is aimed at promoting entrepreneurship, and supporting the growth of small and medium enterprises. Considering SMEs play a crucial role in the country’s economic development and job creation, empowering small businesses results in more employment opportunities and boosts economic growth.
Wrapping Up
Collateral-free business financing in the country, such as the IIFL Finance business loan, extends numerous benefits to SMEs. These loans give easy access to credit, and entail a simplified loan application process. You also get highly competitive interest rates and can choose your repayment terms.
Collateral-free loans encourage and promote entrepreneurship, empower small businesses, and contribute to the growth of the MSME sector in India. These loans help SMEs looking for access to credit to meet their financial needs.