Many small and medium enterprises face challenges in mobilizing capital for their business. This challenge is much more severe for start-up businesses. The challenge comes from the fact that SMEs have limited owned capital available to start a business and sustain it during initial tough years. Coupled with this is the fact that banks and financial institutions ask for collateral before deciding to fund SME business. Considering these bottlenecks, what are the options available to small enterprises to raise capital without collateral?

The answer to this question lies in a scheme named as CGTMSE (Credit Guarantee Fund Trust for Small and Medium Enterprises).

CGTMSE was started in the year 2000 and came into force August 1, 2000. The key objective of the scheme was to provide collateral free loans to small businesses. Keeping this objective in view, the Ministry of Micro, Small & Medium Enterprises (MSME), Government of India, launched a credit guarantee scheme (CGS) so as to strengthen the credit delivery system and facilitate flow of credit to the MSE sector.

Loans under CGTMSE are available to small and medium enterprises in both the start-up as well as existent phases. The loans are given through Member Lending Institutions (MLIs). All leading banks offer loans under the scheme. The list of MLIs is available on the website of CGTMSE. Loans given by MLIs under the scheme are guaranteed by CGTMSE subject to limits. Following are the features of the scheme:

·         Under the scheme, loans offered to SMEs are collateral free. That means there is no requirement for small enterprises to bring in their own collateral to avail loan. The credit given to them under the scheme becomes prime security for the banks

·         Under the scheme, loan up to to 100 lakhs is available

·         Loans can be obtained for working capital requirements, purchase of machines, expansion plans etc.

·         Loans given by MLIs

·         Small businesses involved in retail trade are not eligible

·         The loan under the scheme is disbursed through MLIs( Member Lending Institutions)

·         Guarantee fee and annual service fee needs to be paid by the borrower who avails loan under the scheme. Guarantee fee can be up to 1.5 percent of the loan amount and annual service fee can be 0.75 percent. This depends on member lending institutions

·         PAN is required to apply for loan under the scheme

·         Loans up to 100 lakhs can be obtained simultaneously from more than one Member Lending Institution (MLIs).

While the scheme is meant to help SMEs avail collateral free loan, SMEs need to do home work before applying for the loan under the scheme. The key aspects that need to be worked on are preparation of business plans, KYC compliance, and financial statements for exiting business. Also important point to remember is that loans have to be repaid by the business hence sustainable performance should be maintained.