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About Collateral Free Loans

Collateral free loans refer to any loan that doesn't require a backing of an asset, security deposit or a guarantor. It is an unsecured loan. The collateral free business loans are unsecured and consider your current income, cash flows and viability of the business to ensure that you can repay your loan timely.

First, let us ask ourselves, what is a Collateral? Collateral is an asset which has a definite financial value against which you can borrow money. The assets which can be pledged to avail a loan are real estate, land, machinery, shares & stocks, and vehicles. In case you are not able to repay the loan, the lender reserves the right to take permanent custody of the pledged asset and sell it to recover the loan amount that is unpaid.

Collateral free loans do not require you to pledge any asset and offers you complete flexibility and peace to avail any loan. You can avail Collateral Free loan for personal as well as business purposes. Higher education, medical emergencies, as well as marriage expenses can be funded as collateral-free loans. There are many business loans that are collateral-free. One of the collateral free loans that are very popular is Cash Credit and Term Loan under CGTMSE.

As per the CGTMSE, the micro and small enterprises (MSEs) are eligible for collateral free loans up to Rs 1 crore. This scheme has been proposed to give an impetus to the micro and small enterprise in India. This sector has long been plagued by issues such as lack of funding, growth opportunities, working capital requirements and scaling the business. The Government of India in collaboration with the SIDBI has launched this loan so as to ensure the viability of the SME projects.

Collateral Free Loans
Collateral Free Loans

What are the features of the CGTMSE collateral free loan?

  • The loans are available for an amount up to Rs 2 crore (Rs 1 crore for retail trade) as per the terms of the MSMED, act of 2006.
  • There may be loans for a higher amount as well. However, any amount more than Rs 1 crore will require the support of collateral. This collateral can be in the form of Plant & Machinery, Land or any other business property owned by the proprietor.
  • Both, New and existing MSEs can avail the loans
  • These loans are available for working capital and term Loans
  • The Guarantee Cover requirement as per the categories of the loan is 75%, 80%, and 85%, respectively.
  • The entities excluded from the loan coverage are educational/training institutions, retail trade, and SHGs.
  • Manufacturing, as well as the Service sectors are covered.

What are the benefits of collateral free loan?

The biggest benefit of a collateral-free loan is the fact that there is no requirement of collateral. Some of the other benefits are:

  • The loans are given at subsidized interest rates
  • The repayment is flexible with tenure up to 5 years
  • Letter of Credit and bill discounting is available up to 180 days.
  • There is no check of credit history while sanctioning this loan
  • The funding is also available for product development
  • The application processing is hassle-free and very quick

What are the eligibility criteria for availing collateral free loans?

The eligibility criteria are very straightforward for availing these loans:

  • The private limited companies with SME/SSI registration are eligible to apply
  • Sole Proprietorship Firms, Private limited Companies, Partnership Firms, Public Limited Companies

How to apply for the collateral free loan under the CGTMSE?

  • You need to start your business operations, get all the licenses in place and register your business. You also need to open a current account at a bank and obtain a business PAN card.
  • You need to prepare a Detailed Project Report which indicates the viability of the project along with quantifiable metrics like ROI, Payback, and break-even. You must involve professional help in preparing the feasibility report so as to convince the lenders about the prospects of the business
  • You need to approach the bank in person and apply for the loan. It is advisable to approach 2-3 banks so as to have wider options for loan sanctions.
  • Once the loan is sanctioned, the bank will apply for the subsidy coverage to the CGTMSE. The bank needs to submit various documents to get the approval of the scheme. Once the CGTMSE agrees to provide you coverage, you will need to pay the CGTMSE guarantee fee as applicable.

All the public sector banks such as SBI, Allahabad Bank, UCO Bank, Bank of Baroda, Bank of India, Corporation Bank, Dena Bank, IDBI Bank, and Indian Overseas Bank offer the collateral-free CGTMSE loans.

The private sector banks offering these loans are ICICI Bank, Axis Bank, HDFC Bank, IndusInd Bank, Kotak Mahindra Bank, ING Vysya Bank etc.

Frequently asked questions: Collateral Free Loans

1. Who is eligible for the collateral-free CGTMSE loans?

Micro/ Small Enterprise (manufacturing/ services) as defined under MSMED Act, 2006 and by RBI is eligible for this loan. Retail sector and Education sector are exclusions to this loan.

2. What is the purpose of this loan?

The funds from this loan can be utilized by MSEs for financing Working Capital, Term Finance for Capex, product development, business expansion etc.

3. What is the maximum loan amount that can be sanctioned under the CGTMSE loan?

A maximum of Rs 1 crore will be sanctioned under this scheme.

4. What is the interest charged on these loans?

The interest charged is left to the discretion of the bank and charged as per the bank base rate.

5. What is the tenure of these loans?

The tenure for cash credit is 12 months, while for the Term loan it is a maximum of 5 years.


Credit boost likely for rural women SHGs3 Jan 2020

The government is looking forward to doubling the cap for collateral-free loans given to self help groups for women in rural India. It seeks to boost entrepreneurship and economic activity by providing around Rs. 20 lakhs. Data shows that under this ...

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The government is looking forward to doubling the cap for collateral-free loans given to self help groups for women in rural India. It seeks to boost entrepreneurship and economic activity by providing around Rs. 20 lakhs. Data shows that under this scheme, Rs. 66,925.46 crores were disbursed in 2018-19 from Rs. 23,316.34 crore in 2013-14. In the current financial year the figure is expected to cross Rs. 95,000 crore. More the credit in the rural economy will help spur economic activity.

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