How To Attain Collateral Free Loans For Your Startup? 

In an earlier article on Inc42, I had spoken about how under the Ministry of MSME (micro, small & medium enterprises), the Government of India is equipping micro, small and medium businesses with finances. I had also spoken about why these funds are a better option than VC funding and what are the various financial support options that the businesses can get access to.

In this article, I’ll throw light on the procedure for attaining collateral free loans for startups and the various components that are an integral part of the process.

The Definitions

As indicated by MSMED Act 2006 the MSME segment has been largely sorted into Manufacturing Enterprises & Service Enterprises:

• Manufacturing Sector Enterprise – engaged in manufacturing or production, processing or preservation of goods.
• Service Sector Enterprise – engaged in providing or rendering of services.

What is the purpose of the MSME scheme? Where all can businesses utilise the money?

• Working capital needs: Fund-based and Non fund-based
• Term loan for construction of building, office and acquisition of machines/equipments including expansion and modernization of unit.

To attain a loan, the projected revenue amount of the business should be 4X of the loan requested. Manufacturing companies need to show assets and stock statements.

The below table reflects the investment ceilings for classifying Micro, Small and Medium Sector Enterprises.

Frequently Asked Questions

What is the eligibility criterion for getting a loan?

The most important eligibility and decisive factor is return on the investment and profitability of the project proposed to be set up. Any financial institution will support the project if repayment is assured.

Under what conditions can I avail financial assistance?

• Eligibility criteria
• Technical/economic capability
• Promoters contribution
• Ability to repay loan
• Collateral securities/guarantee

What is the procedure for getting a loan under MSME Scheme?

Prior to approaching a banker or an investor to get funds, entrepreneurs should first prepare a pitch that explains the business model, entrepreneur’s background, revenue model, estimated sales, estimated profit, estimated growth rate and returns. Return on investment is a key factor for both banks and equity investors. Therefore the entrepreneur should put together a detailed project report (defined below).

Once the investment pitch is ready, identify potential banks that have schemes or the facility to provide you with the requested funding.

Then, An Entrepreneur Must

• Get in touch with the concerned financial institution which can be a State Financial Corporation, NSIC, bank branches etc.
• Applications in prescribed proformas have to be submitted along with project report including proof of ownership/availability of land/building, proof of residence, collateral securities (wherever applicable) etc.
• The loan is given by the institution if the application meets the norms.

An Applicant Requires The Following Documents

Company Registration Certificate: The certificate of incorporation is a legal document relating to the formation of a company or corporation. It is a license to form a corporation issued by the state government. Its precise meaning depends upon the legal system in which it is used.

MSME registration: The registration of the business under the MSMED Act.

Individuals IT returns for three years: Every individual filer who earns a certain amount of income must file this type of tax return – the statement of earnings from various sources of income, tax liability thereon, details of tax paid and any refunds that have to be given by the government. If company is in business for over a year then the company IT returns too.

Business proposal: The written documents stating the sell from the seller to the prospective buyer.

Provisional balance sheet: The financial document widely used by companies to prepare for financial audits or report financial information for any reason.

Project Report: A document which gives an account of the project proposal to ascertain the prospects of the proposed plan/activity. The project report contains detailed information about –

• Land & building required
• Manufacturing capacity per annum
• Manufacturing process
• Machinery & equipment along with their prices & specifications
• Requirements of raw materials
• Power & water required
• Manpower needs
• Marketing
• Cost of the project and production
• Financial analyses & economic viability of the project

*Above mentioned terms & processes may vary from bank to bank and period to period.