Collateral-Free Working Capital Loan – A Guide

Collateral Free Working Capital Loan

Small business loans are both hard and easy to get. If your business has a verifiable history and you adhere to the tax and policy guidelines laid by the government, then it is easy to secure a business loan. And if, your papers are out of order, then it is a little harder to get one. Still, small business owners who are careful in managing their income and expenditure, and regularly pay due tax, can also find it hard to secure institutional finance in the current economic environment.

The banking sector in India is facing an unprecedented rise in non-performing assets a.k.a. NPAs. This has put pressure on most public and private sector banks to lend prudently. While the additional measures of scrutiny are the need of the hour, they are definitely affecting the investment environment in the country. Also, since the Indian economy is the fastest growing major economy in the world at the moment, a lack of investment doesn’t bode well for small and medium enterprises which contribute over 45% to the GDP growth.

Fortunately, the alternate finance industry has taken the mantle for providing working capital finance for SMEs of India. Non-banking financial companies like Lendingkart Finance are leading traditional banks in terms of funding and nurturing SMEs. There are several benefits of FinTech finance as it is popularly known because of its reliance on Big Data and Internet of Things.

Benefits of MSME Loan Without Collateral

Faster Business Loans: FinTech companies like Lendingkart are offering small business loans with a minimum turnaround time of 72 hours. This has been made possible by switching to online application, documentation and verification of loan requirements. Since the government has also emphasized digitization in its schemes and policies, it has become easier to verify most of the financial information online.

Unsecured Business Loans: NBFCs are not only offering business loans faster but are also offering Collateral-free finance solutions i.e. putting an asset up as security for the loan amount. Thus, removing one of the biggest problems of unsecured working capital loan faced by small and medium enterprises when applying for a business loan.

Lower Interest Rates: By eliminating manual work hours in loan processing, NBFCs are saving more in terms of operational costs. The benefits of which are then passed on to the borrowers in form of lowered interest rates on small business loans. With a good credit score and healthy balance sheet you can secure a business loan at half the rate of private money lenders.

Flexible Monthly Installments: NBFC loans are also quite business friendly as they offer multiple repayment options in comparison to bank loans which have fixed EMI schedules. For example, Lendingkart Finance gives you an option to repay your business loan in bi-weekly or monthly installments. So, if you are confident of generating revenues faster, you can also repay your loan faster. Otherwise, you can opt for a more relaxed repayment plan.

Waiver of Fees and Charges: Another benefit of FinTech business loans being online is that you pay minimal processing charges. Lendingkart has a processing fee of just 2% to 5% (depending on sanctioned loan amount), which is several notches lower than that of a bank. Furthermore, NBFCs are also waving of prepayment charges / penalties if you decide to repay your loan early.

Renewable Business Loans: A huge benefit of taking a small business loan from an NBFC like Lendingkart is that you can easily renew your sanctioned loan amount upon repayment. So, it is a kind of revolving finance facility that you are getting for managing your working capital.

Less Strict Eligibility Requirements: Non-financial banking companies (NFBCs) and FinTech lenders have simpler eligibility criteria compared to traditional banks. This makes it easier for small and medium businesses to qualify. They often focus on the overall health of your business, such as cash flow and turnover, rather than solely on credit history. For instance, Lendingkart requires minimal documentation, and businesses with a lower credit score but good revenue can still qualify. It allows more access to funds when you need them the most. 

Easy Application Process: The online application process for working capital loans without collateral is quick and hassle-free. It only takes a few minutes to complete. Unlike traditional bank loans that require multiple branch visits, many NFBCs allow you to apply, upload documents and receive approvals all from the comfort of your home. This digital approach speeds up loan disbursement, ensuring your business has the working capital it needs without unnecessary delays.  

Credit Score Improvement: Last but not the least, NBFCs also report your transactions to the credit rating agencies, which in turn helps in raising your credit score. So, by getting a small ticket business loan from an NBFC, you are inadvertently opening the doors to larger financial investments for your SME.

Eligibility Criteria to Get Collateral Free Loans for MSMEs

To get an MSME loan limit without collateral, you need to meet the following criteria:

• Business Experience: Applicants must have a minimum of three years of business operations in the same industry with a proven track record. Plus, the business should have an annual turnover of at least ₹40 lakh. This requirement showcases the enterprise’s stability and ability to manage finances over a sustained period. 

• Profit Generation: The business must have demonstrated profitability for at least one financial year. This condition ensures that the business is financially sound and capable of repaying the loan. 

• Business Structure: The loan is accessible to various types of business entities, including Sole Proprietorships, Partnership Firms, Private Limited Companies (Pvt Ltd),  Trusts, and Limited Liability Partnerships (LLPs) engaged in manufacturing, trading, or service provision. The wide eligibility supports diverse business models. It allows more entrepreneurs to access funding. 

• Age Requirements: The primary applicant should be between the ages of 25 and 65 at the time of loan maturity. This age range ensures that the applicant has sufficient working years ahead. It reduces the risk associated with loan repayment. 

Fees and Charges to Get MSME Loans without Collateral

While applying for a loan without collateral under the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), borrowers are required to pay a guarantee fee. This varies based on the sanctioned loan amount. 

• For loans up to ₹10 lakh: The fee is 0.37% per annum
• For loans ranging from ₹10 lakh to ₹50 lakh: The fee is 0.55%
• For loans ranging from ₹50 lakh to ₹1 crore: The fee is 0.60%. 

Although these charges are necessary to maintain the risk coverage, they are comparatively lower than the typical bank charges. It makes this a cost-effective option for MSMEs looking for financial support without collateral. 

How to Secure an MSME Loan with No Collateral

Obtaining a collateral-free MSME loan is streamlined through various government and non-banking channels. These are specifically designed to support micro, small, and medium enterprises without the need for security. Here’s how you can avail of such loans:

• The CGTMSE scheme provides loans up to ₹10 lakh without the need for security, offering a safety net for lenders through a credit guarantee. 
• The Pradhan Mantri MUDRA Yojana offers unsecured loans up to ₹10 lakh for startups and small businesses in the non-farming sector. It provides flexible terms tailored to business needs.
• The Stand-Up India Scheme supports women entrepreneurs and SC/ST individuals by facilitating loans between ₹10 lakh and ₹1 crore. This is specifically helpful for new ventures in manufacturing, services, and allied activities.
• For faster processing, MSME loans in 59 minutes enable businesses to apply for loans up to ₹5 crore through an online portal. It links them to multiple banks and streamlines approvals within a short timeframe. 
• NFBCs like Lendingkart also offer attractive options for getting a loan without security. From faster disbursement of loans to flexible repayment terms, they cater specifically to the needs of MSMEs without the need for collateral. 

Loans Under the CGTMSE Scheme

The CGTMSE scheme is a flagship initiative that provides MSMEs with access to term loans and working capital loans up to ₹10 lakh without requiring any collateral. The scheme ensures up to 75% coverage of the loan amount. This increases to 80% for women entrepreneurs or businesses located in the North-East region. Interest rates start from 7.5%, offering a competitive option for businesses looking to fund asset purchases like machinery and equipment. The loan repayment tenure can extend up to 10 years. It allows businesses the flexibility to repay based on their financial stability. 

MUDRA Loans

MUDRA loans are a three-tier category of collateral-free loan by government designed to support micro and small businesses. It offers term loans, working capital loans, and overdraft facilities. These loans cater to diverse business needs, including startups, growing enterprises, and established businesses. MUDRA loans are categorized into three segments:

• Shishu loans: Loans up to ₹50,000
• Kishor loans: Loans from ₹50,000 to ₹5 lakh
• Tarun loans: Loans from ₹5 lakh to ₹10 lakh

The flexible repayment tenure of these loans ranges from one to five years. The interest depends on the borrower’s profile and business requirements. These loans are ideal for businesses needing funds for non-farming activities and are available through public sector banks, and microfinance institutions.

Stand-Up India Scheme Loans

Targeted towards women entrepreneurs and individuals from SC/ST communities, the Stand-Up India Scheme offers loans ranging from ₹10 lakh to ₹1 crore to set up new ventures. The scheme supports manufacturing, trading, and service sector businesses, encouraging diversity in business ownership. With an interest rate of 5.5% and a repayment period of up to 7 years. These loans provide a viable route for underserved communities to enter and thrive in the business world. 

MSME Loans in 59 Minutes

The MSME loans in 59 Minutes initiative revolutionizes the way MSMEs access by offering quick and hassle-free loan approvals through an online platform. Businesses can apply for ₹10 lakh to ₹5 crore loan without collateral with interest rates starting from 8.5%. The portal simplifies the loan process by linking applicants with various banks. It reduces the approval time significantly. Although the initial approval is quick, the final sanction depends on the bank’s evaluation of the business. It provides a blend of speed and thorough vetting.

NFBC Loans for MSME without Collateral

Non-banking financial companies (NFBCs) like Lendingkart play a crucial role in providing unsecured loans for MSMEs. It offers flexible terms and quicker access compared to traditional banks. This is a feasible loan for starting new business without security. It is also ideal for seeking funds for expansion, technology upgrades, or working capital needs without the bureaucratic hurdles associated with conventional banking. The documentation process is minimal, and eligibility criteria are generally more lenient. This makes it easier for small businesses to qualify. NBFCs give competitive interest rates and repayment options that can be aligned with the cash flow of the business. These loans present a practical alternative for securing the necessary funds without pledging assets.

Applying for a Business Loan with Lendingkart

Lendingkart is one of the leading business loan providers in India, offering short-term working capital finance up to ₹ 1 crore for SMEs. To get a 1 Crore business loan you simply need to follow the following steps.

Getting your Documents in Order: Before applying for a business loan with Lendingkart, make sure that you have the digital copies of following documents handy.

• Business registration/incorporation certificate and Company PAN Card
• Bank account statements of all business-related accounts for the past 1 year
• Personal/partner/director identification such as Aadhar and PAN Card

Assessing your Loan Requirements: Another thing to keep in mind when applying for a business loan with Lendingkart is that you should do a realistic analysis of your financial needs. Applying for an overly ambitious loan amount may see your application rejected whereas under applying may not fulfill the purpose for which you are taking a business loan.

Improving your Credit Rating: This is a one-off step for companies with a less than ideal credit rating. We recommend that you take steps to improve your credit rating by repaying existing debt and streamlining your finances before applying for a business loan to get the maximum benefit in terms of loan amount sanction and interest rates.

Now that you are ready to apply for a business loan, head over to the Lendingkart website or download the Lendingkart app on your Android or iOS smartphone to create a free loan account. The process for application is fairly straightforward, fill in your business details, loan requirements and upload the aforementioned documents to get an instant business loan quote. The quoted loan amount can be equal to or slightly lower than the requirement you share with us. Choose to accept the loan offer and Lendingkart will start the verification process.

You can easily track your loan application status from your Lendingkart loan account online. If all things check out, Lendingkart will credit the funds to your business account within 3 days of application.

For securing quick, collateral-free loans from Lendingkart.

FAQs:

1. What is the limit of collateral-free loan?

The limit of a collateral free working capital loan typically varies among lenders but is often capped at a maximum amount, usually up to 1 Crore INR (Indian Rupees). The actual limit may depend on factors like your business’s financial health and creditworthiness.

2. What are the benefits of collateral-free working capital loans?

Collateral-free working capital loans offer several advantages, including quick access to funds, simplified application processes, reduced financial risk for borrowers (since no assets are pledged as collateral), and the flexibility to use the loan for various business purposes.

3. What are the eligibility criteria for obtaining a collateral-free working capital loan of up to 1 Crore?

Eligibility criteria may vary by lender for small business loan up to 1 crore, but common requirements include a strong credit score, a profitable business history, and the ability to demonstrate a stable income. Other factors may include the industry in which your business operates and its overall financial health.

4. What is the interest rate typically associated with collateral-free working capital loans?

Interest rates for collateral-free working capital loans can vary depending on the lender and the borrower’s creditworthiness. Rates may be fixed or variable and are often higher than secure unsecured business loan due to the increased risk for the lender. It’s essential to compare rates from different lenders to find the best option for your business.

5. Is a good credit score necessary to secure a collateral-free working capital loan?

Yes, a good credit score is often a crucial factor in obtaining a working capital loan without collateral. Lenders use your credit score to assess your creditworthiness and determine the interest rate. While some lenders may work with lower credit scores, a higher score can help secure better loan terms and options.