Starting and growing a business can be challenging, especially when securing the necessary funding. For Micro, Small, and Medium Enterprises (MSMEs) and startups, the lack of collateral often hinders access to financial support, preventing many from reaching their full potential.
However, there are government schemes for businesses designed to address this issue and provide startups with the financing they need to thrive. One such initiative is the Credit Guarantee Scheme for Startups (CGSS), which offers collateral-free loans backed by the government.
This guarantee scheme allows businesses to access much-needed capital without the risk of pledging personal or business assets. In this blog, we will learn the details of the guarantee scheme, its eligibility criteria, and the benefits it offers to startups and MSMEs.
What is the Credit Guarantee Scheme for Startups?
The Credit Guarantee Scheme for Startups (CGSS) is one of the most notable government schemes for business in India. It helps startups gain access to financing without the need for collateral, making it an invaluable tool for emerging businesses. The scheme is specifically designed for startups that have been recognised by the Department for Promotion of Industry and Internal Trade (DPIIT).
Administered through the National Credit Guarantee Trustee Company (NCGTC), CGSS offers collateral-free debt funding of up to ₹10 crore to startups. This scheme operates under two primary frameworks: transaction-based and umbrella-based credit guarantee schemes, which cater to different types of financing needs for startups.
Eligibility Criteria for CGSS
To avail the benefits of the guarantee scheme, startups must meet specific eligibility criteria outlined by the government. These criteria ensure that only eligible businesses receive financial support, promoting responsible lending and preventing misuse of the scheme. The eligibility requirements for CGSS include:
- Recognition by DPIIT: The startup must be officially recognised by the Department for Promotion of Industry and Internal Trade (DPIIT).
- No Outstanding Defaults: The startup must not have any outstanding credit defaults with financial institutions or investors.
- Non-Performing Asset (NPA) Status: The business must not be classified as a Non-Performing Asset (NPA) according to RBI guidelines.
- Stable Revenue: The startup should demonstrate stable revenue, which can be verified through audited monthly statements for the past 12 months.
- Additional Criteria: Startups must fulfil any additional eligibility requirements specified in the scheme.
Key Features and Benefits of CGSS
The CGSS offers a range of features and benefits that make it an attractive option for MSMEs and startups seeking financial assistance. Some of the key benefits include:
- No Collateral Requirement
One of the most significant advantages of the guarantee scheme is the absence of a collateral requirement. Startups often struggle to secure financing in their early stages because they lack assets to pledge as collateral. By offering a collateral-free credit guarantee, CGSS eliminates this barrier, allowing startups to access much-needed funds without risking personal or business assets.
This provision encourages entrepreneurs to pursue innovative ideas and business ventures without the fear of losing valuable assets, fostering growth and creativity in the business ecosystem.
- Nominal Guarantee Fee
Another appealing aspect of the guarantee scheme is its low guarantee fee. The guarantee fee for CGSS is set at a nominal rate, typically around 2% or 1.5%, making it highly affordable for startups. This low fee helps reduce the overall cost of financing, making it easier for startups to access capital without incurring high upfront costs.
- Flexible Credit Facilities
The guarantee scheme offers a variety of flexible credit facilities curated to meet the unique needs of different businesses. From a startup that requires funding for working capital, business expansion, to asset acquisition, the scheme provides the flexibility to choose the right loan option. The two primary frameworks are transaction-based and umbrella-based guarantees, ensure that businesses can select the most suitable funding structure for their specific requirements.
- Support from Member Institutions (MIs)
The Credit Guarantee Scheme operates through MIs, such as banks and financial institutions, which extend loans to eligible startups. These MIs play a crucial role in the scheme’s success, as they evaluate the creditworthiness of startups and provide the necessary financing. The guarantee provided by National Credit Guarantee Trustee Company (NCGTC) reassures these institutions, enabling them to lend to startups with greater confidence.
- Promotes Business Growth and Expansion
By offering collateral-free loans and reducing the risk for financial institutions, the guarantee scheme makes it easier for startups to access funding for expansion and growth. Startups can use the funds to purchase new equipment, hire staff, improve infrastructure, or invest in marketing, all of which are essential for scaling up operations and enhancing competitiveness in the market.
- Boosts Innovation and Entrepreneurship
The Credit Guarantee Scheme for Startups helps promote innovation and entrepreneurship by providing financial support to new and innovative businesses. Startups often face challenges securing funding due to the high risk of their ventures. This scheme mitigates that risk by providing a safety net for both the lender and the borrower, encouraging more entrepreneurs to launch businesses and explore creative solutions to market needs.
How to Apply for the Credit Guarantee Scheme?
The application process for the guarantee scheme is straightforward and involves the following steps:
- Register the Startup with DPIIT: The first step is to ensure that DPIIT officially recognises the startup.
- Choose a Member Institution: Startups must approach a bank or financial institution enrolled in the scheme.
- Submit the Application: The startup must submit the required documentation, including financial statements, business plans, and other necessary information, to the chosen member institution.
- Receive Loan Approval: If the startup meets the eligibility criteria, the loan will be approved, and the NCGTC will provide the necessary guarantee coverage.
Strengthen Your Business’s Future with the Right Financial Support
Guarantee schemes play a pivotal role in supporting MSMEs and startups by providing collateral-free loans, helping them overcome financial barriers and fuel growth. These schemes not only reduce the risk for lenders but also empower entrepreneurs to innovate and expand without the fear of losing valuable assets.
With features such as low guarantee fees, flexible loan options, and government-backed business schemes, startups can secure the funding they need to thrive. Partnering with financial institutions like HDFC Bank, which offers comprehensive support under such schemes, ensures businesses can take full advantage of these opportunities. With these benefits, startups can confidently scale their operations and achieve long-term success.
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