Collateral free loan to MSME: Get CGTMSE coverage up to Rs.2 crores
Collateral free loans for MSME are the loans provided to a borrower without any guarantee that is you do not have to offer any asset or pledge any collateral and not even any third party guarantee. The main objective behind collateral free loan for MSME is to give importance to project ideas and to secure the credit facility purely on the basis primary security created out of the finance provided under the scheme.
So to strengthen credit delivery system and facilitate flow of credit to the MSME sector without collaterals, Government of India has set up the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE coverage ) providing coverage up to rupees 2 crores. This means CGTMSE coverage will act as a security of loan provided to micro and small enterprises, and thus increase endeavor among lender to give composite collateral free loan for MSME to the borrowers.
In this article, you will get to know every single detail about collateral free loan for MSME provided under CGTMSE coverage so that you become familiar with the product and can approach banks for collateral free loan to MSME without hassle of collaterals.
PURPOSE of collateral free loan for MSME.
Purpose of providing collateral free loan for MSME is to provide credit facilities to MSME entrepreneurs without collateral / third party guarantees, and this would be a major source of support to the first generation entrepreneurs to realize their dream of setting up a new start up or a manufacturing/ trading unit of their own Micro, Small, medium Enterprise (MSME). SO main purpose of this scheme is to provide collateral free loan for MSME to strengthen credit delivery system and facilitate flow of credit to the MMSE sector.
Both New and Existing business unit under MSME — Small Business Including Retail Trade are eligible under this credit guarantee scheme of CGTMSE coverage for Cash Credit and Term Loan.
This type of a business loan is approved and disbursed faster usually within maximum time frame of three weeks. It can be availed to meet various purposes, such as working capital, capital, machinery purchase, etc.
|To avail collateral free loan for MSME under CGTMSE coverage you have to apply by submitting you loan application dully filled along with KYC documents in offline mode with any of the public sector banks and you can also check details of financial institutions which are eligible for providing Collateral free loan at official website of CGTMSE or click here to check complete list|
Collateral free loan for MSME Eligible borrowers.
Both New and Existing business units under MSME — Small Business Including Retail Trade, Service Enterprises, are eligible under this scheme for collateral free loan to MSME. Individual, Sole Proprietorship Firms, Partnership Firms, Private limited Companies, Public limited Companies are included under this scheme.
All the activities that come under service sector as per MSMED Act, 2006 are eligible for collateral free loan under CGTMSE coverage scheme. Activities like Educational Institutions, Agriculture, Self Help Groups (SHG), Training Institutions are excluded from this scheme.
However, as a proof of genuine business activity, the applicant had to produce Trade License, Certificate issued under Shop & Establishment Act, GST Registration Certificate.
Fund and non-fund based (Letters of Credit, Bank Guarantee, etc.) credit facilities up to 200 lakhs per borrower are eligible for collateral free loan to MSME under CGTMSE coverage credit guarantee coverage scheme for both new and existing business units.
|The facilities where immediate flow of funds is available to borrowers, are called funds based facility means actual flow of cash is done in these types of credit facilities. The non-fund based facilities are not actual these are contingent in nature mean there may or may not be a real cash outflow in the future. They are like issuance of letter of guarantee, letter of credit wherein banks get fee income, and there is no immediate outflow of funds from bank|
Eligible Credit Facilities for collateral free loan to MSME.
Banks lend collateral free loans to MSME for productive purposes such as working capital need of a business enterprise or term loans for capital expenditure. Let’s understand both the facilities which you can avail under collateral free loans.
Cash credits for collateral free loan for MSME
These loans are given to manage the working cycle of a business, Cash credit operates like a current account you can deposit and withdraw amount as much time as you wanted to but within your prescribed limit. Your cash credit limit is fixed Based on sales and production of your business. The advance sanctioned under cash credit arrangement have no specific date of repayment. In practice the sanction is for one year but the limits are rolled over at the end of every year, which means your cash credit limit gets renewed at the end of period after due review of all your account statements, balance sheets and profit loss accounts.
So, you need to prepare you statement of means and financial statement once in a year for timely review renewal of you limit.
Term loans for collateral free loan for MSME
These are the loans which are repayable over a medium or long-term period up to 10 years. These loans have definite repayment schedule with installments. Generally given for creation/purchase of capital assets required for the establishment of new unit, and for extension of an existing unit.
|Cash credit||Term loan|
|· You can avail Working Capital Cash Credit against Stocks & Book Debts (Book-debts not exceeding 90 days) can be sanctioned under the scheme.|
· You can get Limit against Book Debt will not exceed 50% of the total assessed limit.
No Cash Credit will be sanctioned against book debt only.
|You can avail term loan Credit up to maximum rupees 100 lakh or 80 % of the of the Cost of acquisition/creation of fixed assets .|
Book debts means all debts, revenues, and claims both present and future (including things in action) which may give rise to a debt, revenue or claim in the future. In simpler words book debts are your future expenses, these expenses may be purchase of raw material, payment to debtors, etc.
You need to prepare project report of your business from a certified CA, he will make all these things properly segmented.
Computation of loan amount for collateral free loan for MSME.
Banks do not and cannot lend merely because someone ask for the loan. They have to make assessment of repaying capacity of the borrower before sanctioning any loan. In view of this banks demand project report of your business.
Project report should be as per bank format prepared by a well certified Chartered accountant. Banks generally use certain standard tools like analysis of your project reports, financial statements to check viability of your business.
Computation of your loan amount has been done Based on projected sales which is there on the project report prepared by you.
|Cash credit||Term loan|
|25% of Projected Sales (for Existing/New Units/Green field accounts)|
For existing units, the projected sales should be consistent in comparison
to previous year sales
|The applicant should be able to repay the EMI from his/her/there profit/income.|
Documents required for collateral free loan to MSME.
To simplify, the process of getting collateral free loan to MSME under CGTMSE coverage document requirements are made minimum. Along with the Common MSME Application form you will need to deposit your address proof, age proof, identity proof documents, your bank statements and balance sheet of your business along with profit and loss accounts.
|New enterprises||Existing enterprises|
|· Estimated balance sheet of present year and projected balance sheet of next year.|
· ITR of last three years.
· IT PAN number is mandatory to avail the credit facility.
Statement of Means
| Last two year’s balance sheet along with estimated balance sheet of present year and projected balance sheet of next year |
· ITR of last three years
· IT PAN number is mandatory to avail the credit facility.
Statement of Means
Security and guarantee for collateral free loan to MSME.
As these loans are collateral free loans to MSME backed by credit guarantee scheme of CGTMSE coverage so, generally these loans take hypothecation of the primary assets which are created from the funding provided.
But in contrary to this maximum credit risk borne by CGTMSE coverage is restricted to 75% of the total amount and in the case of women entrepreneurs guarantee coverage is 80% So, Bank may ask you for some collateral security up to 25-30 % of the total credit facility, whereas the remaining part of the credit facility is covered under Credit Guarantee Scheme of CGTMSE coverage.
Collateral Security: If offered
• Collateral Security should be in the form of Non-Agricultural Land, Building, Fiat, NSCs, LIC Policies, KVPs, Government Bonds, FDRs of Bank.
Agricultural land. Open plot and Shares are not to be accepted by way of collateral security.
|Immovable property, to be mortgaged, may be only in the name of Borrower, Proprietor, Partner, Director. No third party guarantee needed|
Tips which you should consider to avail instant collateral free loan for MSME.
• CGTMSE coverage for women entrepreneur is more so, it is always preferable to have women as sole proprietor, partner or as an authorized signatory.
• Income tax Return for minimum three years had to be kept handy. IT returns for respective years should have been filed before beginning of next Financial Year.” (For example income tax returns for financial year 2018-18 should have been filed before 31/03/2020).IT return will help banks to access your income stability More stability in the income better repayment capability and hence more change to get approval on your loan application.
• Get your financial statements ready from a good chattered accountant with Unique Document Identification Number(UDIN) provided by ICAI, it should be there on your financial statements. UDIN will act as a proof of genuineness of the financial statements, and thus makes a bank feel more secure in your business.
• For instant approval of your loan application offer some secondary collateral security like A Fixed deposit, NSCs, KVPs or any other highly liquid security. But do remember you should not offer more than 25% of collateral in case of male entrepreneur and 20% maximum in case you are a female entrepreneur.
• Get your business registration done. GST registration for collateral free loans under CGSTMSE coverage is mandatory, and it will also provide extra interest subvention on the loan amount.
• Try to submit your application for approval with the bank you are already been in a relationship. The longer is the relationship with the Bank, lesser is the risk of loss to banks and thus higher the chances of loan approval.
• Keep good conduct of your other loan accounts it will help to improve your credit score. If the conduct of the account has been good so far, then banks feel less risk of loss. If your credit score is not good than wait for a few months and do not check your credit score unnecessarily, this will definitely improve your score.
• Borrower has to pay processing fee equal to certain percentage of total loan amount usually 0.50% of loan amount with some upper and lower ceiling cap.
• Credit score-if your credit score is not good than you must clear all your past dues on loans to improve your CIBIL.
Good CIBIL score is more likely to get you concessional interest rates than average CIBIL score.
• Get your Stocks and fixed assets insured against fire, burglary, and other perils to avoid unwanted expenses in case of any such events
|Keep all these things updated, this will help you in reducing loan approval time from weeks too few days.|
Collateral free loan to MSME are always backed by government security and for MSME sector it is provided by credit guarantee trust for micro small enterprises ( CGTMSE coverage ). In India almost all the big lenders and financial institution provides collateral free loans which are backed by CGTMSE coverage but there are always some ins and outs.
Always approach public sector banks as their loan appraisal policies are more transparent. You only need all the facts, information and data right before producing to the credit officer of any financial institution. Credit officer may probe you with some queries regarding your project ideas like manufacturing process of your business, technology which you will adopt, material inputs and utilities, location, Etc. So, you should be able to satisfy him with all his queries.
Just get all these things right before submitting your application for collateral free loan to MSME under CGTMSE coverage. This will definitely reduce your loan sanction process from weeks to days.
You can also submit your queries here click to submit query
Frequently asked Questions on Collateral free loan for MSME.
How can I get Collateral free loan for MSME?
The process of getting collateral free loan for MSME under CGTMSE coverage you have to submit below documents.
– Common MSME Application form for collateral free loan for MSME
– Address proof
– Age proof
– Identity proof documents
– Your bank statements.
– Balance sheet of your business along with profit and loss accounts.
Submit all theses documents and you will definitely get collateral free loan for MSME.
Who is eligible for MSME loan?
Collateral free loan to MSME units are sanctioned to
Small Business Including Retail Trade, Service Enterprises, are eligible under this scheme for collateral free loan to MSME. Individual, Sole Proprietorship Firms, Partnership Firms, Private limited Companies, Public limited Companies are included under this scheme.
What is CGTMSE loan?
Government of India has set up the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE coverage ) providing coverage up to rupees 2 crores. This means CGTMSE coverage will act as a security of loan provided to micro and small enterprises, and thus increase endeavor among lender to give composite collateral free loan to MSME borrowers.