collateral free business loan

How to get Business Loan without Collateral/Security in India?

Any new entrepreneurial venture needs monetary resources. Whether you’re opening a small-scale business or planning something on a global level, you will need enough capital to get started. And it is also very tough to get a loan. Finding the right sponsor to fund your business needs is a real challenge nowadays. Availing credit without the hassles of submitting collaterals or third party guarantees is an even bigger problem. 

There are a lot of factors that banks consider before granting a business loan without collateral such as your credit score, income, the progress of your business, which indicate whether you will be able to repay the loan or not. In recent times, a lot of startups have sprung up in India, and hence there’s an increased demand for a business loan in India without security.

Business loans are not just a necessity in the initial stages of business, but even in the later stages for activities such as procuring fixed assets and inventory, for business scale-up and expansion, and to increase sales. High-interest rates, lack of flexible-repayment schedule and low credit limit often are the stumbling blocks that deter entrepreneurs, especially small and medium enterprises (SMEs), to apply for working capital loans.

[Today, there are several business ideas which fail to climb the ladder of success mainly due to high investment requirements. Read our article on “12 Low Investment Business Ideas In India With High Profit]

Government Loans for Startups in India

Nowadays, more ambitious and courageous individuals are thinking of starting their own business than doing mundane, run-of-the-mill jobs. However, the failure rate of new enterprises is equally high. So, banks and other financial institutions know that there’s a high stake in extending loans to new entrepreneurs. At such times, you can rely upon these funding options to fulfill your monetary needs – 

Credit Guarantee Fund Trust Scheme

Our progressive nation has realized the need to encourage new entrepreneurs to fulfill their ambitions and nurture the adventurous spirit of India. And so, the Government of India provides collateral-free credit to entrepreneurs through the Credit Guarantee Fund Trust Scheme for Micro and Small Enterprises (CGTMSE). You can obtain a loan up to 1 crore under this scheme. However, very few entrepreneurs qualify for the loan, as you have to exhibit financial smartness and business acumen to win the trust of creditors.

SBA Loans

It is not easy for Micro, Small and Medium Enterprises to obtain collateral-free loans without lengthy and hassle-free documentation and approval process. Such enterprises can go for Small Business Administration loans. SBA is a federal agency that acts as a mediator between lenders and borrowers. SBA-guaranteed loans do not require you to have collaterals. SBA financing offers a variety of programs as per your needs. SBA does not provide loans, but it gives guarantee up to 80% on loan provided by the lender.

For instance, you’re looking for a loan to recover the damages done in the case of disaster management. Disaster management is the process of recovering damaged property and saving human lives after natural occurrences such as floods, fires, tsunamis, hurricanes, or bombing attacks by antisocial elements. In such cases, you don’t need to have collateral, but the damaged property can serve as security.

SBA-guaranteed loans are an excellent option to finance your business startup needs. Funds needed for acquisitions, expansion, partner buyouts, and working capital can be acquired through SBA-guaranteed loans. Private lenders are more willing to grant loans to people seeking funds when SBA provides 80% guarantee on the loan amount. Small businesses are more likely to get huge funds at low costs through SBA, and so are more likely to take risks and flourish. SBA partially shares the risk to the lender for providing the loan to the borrower, who otherwise doesn’t look so creditworthy.

[Mudra Yojna Scheme is a scheme, launched by Government of India to encourage the development of the small and micro business sector in India. To know more about this scheme, refer our article How to get Pradhan Mantri Mudra Yojana (PMMY) Loan?]

Business Loans in India Without Security

Crowd Financing

Another option to seek loan without collateral that small businesses can rely on is crowd financing. In this case, financers raise funds from various sources and extend loans to small entrepreneurs without guarantees. The only drawback here is that the interest rates at which the loan is offered are much higher.

Peer-to-peer Lenders

Peer-to-peer lending means creditors and borrowers meet virtually to carry out their transactions. These are non-banking financial institutions that have been actively carrying out their business in India since 2014. In 2017, RBI issued guidelines for these P2P lending platforms. Faircent, i2iFunding, LenDenClub, Lendbox, and Finzy are five such trustworthy P2P lending platforms in India, which you can rely upon to avail unsecured business loans in India.

You can connect with multiple lenders through these online credit marketplaces, and depending upon your credit score and requirements; you can avail a loan up to 10 lacs or more to fund your new business. The approval process is quick, and the repayment process is flexible.

Apart from relying on the above collateral-free business funding options, do the following to qualify as a good candidate for granting credit.

Few other ways to get a Business Loan in India without Security

Starting a Franchise Business

If you find it difficult to get a startup business loan without collateral from a bank at reasonable interest rates, without the hassles of security, which most small entrepreneurs face, it is advisable to start a franchise business rather than an independent one. Franchise businesses are much more successful than stand-alone startups and are more trusted by banks and other loan lenders. They easily qualify for getting a loan than the latter.

Improve your Credit Score

If you want that more and more banks should trust you and grant you collateral-free loans for startups, then all you need to do is improve your credit score. If you have no or very little debt, your credit score increases, and you become more trustworthy in the eyes of loan-givers. So, make sure you have no bad debts, and all your creditors are paid on time. This way, you build a sound financial reputation and have better chances of obtaining a loan. Remember that credit card is the no. 1 spoiler of a credit score. So, pay off all your debts quickly, and get rid of your credit cards.

Draft a Promising Business Plan

Even if the stakes in your new business seem high, by drafting a business plan that sounds convincing and promises success, you can win the trust of creditors and avail collateral free business loans. For an established business too, it is not always easy to obtain loans if your business is not progressing, or if you’re incurring more losses. At such times, you need to show enough shrewdness to highlight your strong points – areas where your company made profits, and hide the downward trends.

Apply for an Unsecured Personal Loan for your Business

At times, it may not be possible for you to obtain a collateral free Business loan if your new business doesn’t seem to show signs of prospering. In such a case, you can apply for an unsecured personal loan, if your personal reputation is better than that of your company’s. Get inspired from the success story of Dr. Suman Gupta, who has set up a multi-specialty healthcare center in South Delhi and successfully availed a collateral-free personal loan of Rs. 15 lac from ICICI bank, to fund his hospital expansion plan.

[After getting the right financial support, it is important to register your company with the Ministry of Corporate Affairs (MCA). Registering your company will give your business a separate legal identity. Read our article on How to Register a Company in India? – Complete Guide for Startups”]

By following these measures to improve your financial reputation in the market, you can make sure you have quick access to enough funds to start your new business or fund an existing one. Don’t let money be the stumbling block in your success. If you don’t have enough assets to qualify for a loan, prove yourself as “credit-worthy”. Any queries related to the above-given loans and schemes, please feel free to approach us by filling the form given below.

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