Ruby McKenzie
Starting a business is an exciting venture, but for many budding entrepreneurs, accessing capital can be a significant barrier. For startups, especially those beginning with limited financial resources, finding loans without collateral requirements is a game-changer.
One such opportunity in India is the Credit Guarantee Scheme for Startups (CGSS), which provides collateral-free funding, making it possible for startups to grow without heavy financial risks. But what truly makes a guarantee scheme reliable for startups? Read more ahead to know more about the key factors that make CGSS an attractive option for startups and what to consider when opting for such schemes.
Understanding the Credit Guarantee Scheme for Startups (CGSS)
The CGSS is specifically designed to address the funding needs of Indian startups. Through this scheme, startups can secure collateral-free credit guarantees of up to ₹10 crore. This support is especially beneficial for startups registered under the Department of Promotion of Industry and Internal Trade (DPIIT).
The scheme is managed by the National Credit Guarantee Trustee Company (NCGTC), which provides a guarantee scheme to member institutions (MIs), like banks and NBFCs, that offer loans to startups.
CGSS operates on a simple yet highly effective premise: providing collateral-free debt funding for startups so they don’t have to rely on personal or business assets to secure a loan. The scheme is available in two formats: transaction-based and umbrella-based guarantees, depending on the nature of the loan and business requirements. For many startups, this financial safety net can be a lifeline, opening doors to growth and innovation without risking personal assets.
Why CGSS Stands Out?
India’s startup ecosystem has rapidly grown, now ranked as the third-largest in the world. With over 1.12 lakh startups registered across 763 districts, it’s evident that the country’s entrepreneurial spirit is thriving. However, obtaining capital remains challenging, with collateral being a common requirement. CGSS’s collateral-free guarantee scheme allows startups to access loans without the burden of providing assets, which is often a challenge for startups bootstrapping their businesses.
Key Benefits of the Credit Guarantee Scheme for Startups
Take a look at some of the key benefits of this scheme to understand how it works.
- No Collateral Requirement
Startups often need more substantial assets, making collateral-based loans difficult to secure. The guarantee scheme removes this obstacle, allowing startups to access funds without pledging personal or business assets.
- Nominal Guarantee Fee
Startups benefit from a nominal fee of 2% on the outstanding or disbursed amount, while the fee is reduced to 1.5% for female entrepreneurs and startups from North-East India. This minimal cost makes the scheme accessible to a wide range of startups.
- Flexible Credit Facilities
The CGSS supports various loan types, such as venture debt, working capital, subordinated debt, and more. These flexible options ensure that startups can access the type of funding that best suits their needs, whether it’s for short-term working capital or long-term expansion.
- Support from Member Institutions
The govt scheme for business requires MIs to validate the startup’s eligibility and project feasibility. Once eligibility is confirmed, the MI applies for the credit guarantee from NCGTC on behalf of the startup, easing the loan approval process for applicants.
Eligibility Criteria for CGSS
To qualify for the guarantee scheme, startups must meet the following criteria:
- DPIIT Recognition: The startup must be recognised by DPIIT, ensuring they adhere to the standards and policies set for startups in India.
- No Default Credit: Startups should not have any default loans with any lending or investment institution.
- NPA-Free: Startups should not be classified as Non-Performing Assets (NPAs) as per RBI guidelines.
- MI Certification: The MI certifies the startup’s eligibility and project feasibility, ensuring the startup’s viability and sustainability.
- Revenue Stability: The startup must demonstrate stable revenue, supported by 12 months of audited financial statements, making it amenable to debt financing.
How Startups Can Apply for CGSS?
Startups can apply for the credit guarantee scheme through MIs, which include:
- Scheduled Commercial Banks: Banks with the necessary accreditation are available for CGSS applications.
- RBI-Registered NBFCs: Non-banking financial Companies with a minimum net worth of ₹100 crore and a credit rating of at least BBB can facilitate CGSS loans.
- SEBI-Registered Alternative Investment Funds (AIFs): AIFs with the necessary credentials can also be approached for CGSS-backed funding.
Tenure and Terms of the CGSS Guarantee Cover
The CGSS guarantee cover is structured based on the nature of the loan:
- Transaction-Based: For transaction-based loans, the guarantee cover extends from the date of guarantee fee payment for the loan duration.
- Umbrella-Based: For umbrella-based loans, the cover applies from the payment of commitment charges, lasting for the venture debt fund’s lifecycle.
What to Consider When Choosing a Guarantee Scheme for Your Startup
- Collateral-Free Funding
A reliable guarantee scheme provides collateral-free loans, which are essential for startups with limited assets. This feature is valuable as it allows startups to secure funding without risking their assets.
- Cost of Guarantee Fee
Guarantee fees can impact your financials. Opt for schemes like CGSS that offer nominal fees and reduced rates for certain demographics, making the funding process affordable.
- Flexibility of Loan Terms
Reliable schemes offer various funding options, from term loans to working capital, giving you flexibility based on your immediate needs. The govt scheme for business CGSS, for instance, supports both short-term and long-term funding needs.
- Ease of Process
Choose a scheme that simplifies the process for you. With CGSS, your MI handles all interactions with NCGTC, allowing you to focus on business operations without navigating complex processes.
- Sustainable Support
A good scheme grows with you. CGSS allows loan enhancements within a capped limit, supporting startups as their needs evolve.
Boosting Your Startup’s Growth with a Reliable Guarantee Scheme
With the right guarantee scheme, startups gain vital access to funding without collateral, enabling innovation and growth. The Credit Guarantee Scheme for Startups (CGSS) offers a strong financial foundation with flexible terms and a straightforward process, helping startups pursue goals without traditional loan pressures.
Consider partnering with established institutions like HDFC Bank can make CGSS access smoother. As a member institution, they support startups through the application process, ensuring eligibility and managing approvals.
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