Starting a business in India can be both exciting and challenging. Among the myriad challenges, securing financing is the most critical. The government has recognised this issue and introduced various schemes to support budding entrepreneurs. One of the most impactful initiatives is the Credit Guarantee Scheme for Startups (CGSS). This guarantee scheme is particularly essential for startups, as it offers financial backing without requiring collateral, a feature that is crucial for new businesses with limited assets.
What is the Credit Guarantee Scheme?
The Credit Guarantee Scheme (CGSS) is an initiative by the government to help startups get loans. It’s meant to support small and medium businesses by guaranteeing that the loans will be repaid so startups can get funding without having to provide collateral. The main goal of the scheme is to make it easier for new businesses to get financial help.
Under this scheme, Indian startups can get credit guarantees of up to ₹10 crore. The CGSS gives credit guarantees to startups that borrow from Member Institutions (MIs) of the scheme as long as the startup is registered by the Department of Promotion of Industry and Internal Trade (DPIIT). The National Credit Guarantee Trustee Company (NCGTC) gives the guarantee to the MIs lending money to startups. Additionally, the CGSS credit guarantee schemes can be based on transactions or cover multiple loans.
Benefits of the Credit Guarantee Scheme
The CGSS offers numerous benefits to startups, including:
- No Collateral Requirement: Most startups bootstrap their way towards success. During this period, they face challenges in arranging finance due to insufficient collateral. The collateral-free CGSS guarantee, a govt scheme for businesses, opens up an easy source of finance for startups.
- Nominal Guarantee Fee: The credit guarantee cover, a beneficial govt scheme for business, is provided against an annual guarantee fee of 2% per annum on the disbursed or outstanding amount. In the case of working capital facilities, it is charged on the sanction amount. For female entrepreneurs and units from North-East India, the fee is 1.5%. The MI may or may not pass on this fee to the borrowing startup.
- Flexible Credit Facilities: Loans under CGSS, a vital govt scheme for business, can be availed to meet various business needs, whether short-term or long-term. The loans can be in the form of venture debt, term loan, working capital loan, subordinated debt/mezzanine debt, debentures, optionally convertible debt, etc. It can also cover a non-fund-based facility that has become a debt obligation. Further, the credit guarantee may be transaction-based or umbrella-based.
- MI Support: The member institution applies for credit guarantee cover against the startup’s loan application. As part of the government scheme for business, the MI ensures the eligibility and project feasibility. The startup doesn’t need to coordinate between NCGTC and MI for loan approval under the Credit Guarantee Scheme.
Eligibility Criteria for CGSS
Before applying for the Credit Guarantee Scheme, startups must meet the eligibility criteria set by the government. Here are some of the key requirements for this govt scheme for business:
- An applicant seeking a loan must be officially recognised as such by the DPIIT according to its periodically issued gazette notifications.
- A startup should not have any outstanding loans or credit defaults with any financial institution.
- The applicant must not be categorised as a Non-Performing Asset based on the RBI guidelines.
- An institution member must validate the applicant’s eligibility.
- The applicant’s business should have stable revenue, which can be assessed from audited monthly statements for the past 12 months and should be suitable for debt financing.
Impact of Takeovers and Foreign Holdings on CGSS
Startups in India are increasingly attracting foreign investment and participating in mergers and acquisitions. However, it is crucial to understand how such changes in ownership might affect a startup’s eligibility under the Credit Guarantee Scheme.
- Takeovers: In the event of a takeover, the startup’s eligibility for the scheme may be re-evaluated. If the new ownership structure meets the original eligibility criteria, the startup might retain the benefits of the scheme. Therefore, startups need to consult with financial advisors before entering into any takeover agreements.
- Foreign Holdings: The involvement of foreign entities in a startup’s ownership does not automatically disqualify it from the scheme. However, the extent of foreign ownership is an important factor. Startups with significant foreign holdings may be subject to additional scrutiny to ensure compliance with the scheme’s guidelines.
- Compliance with Local Regulations: In order to keep receiving the scheme’s benefits, startups need to adhere to all local regulations, which include regulations pertaining to foreign investments and mergers. Any substantial alterations in ownership or structure must be reported on time to the appropriate authorities in order to ensure disqualification from the scheme.
Empowering Dreams, Fueling Growth
The Credit Guarantee Scheme is not just another govt scheme for business, it is an important support for startups in India. The scheme provides access to unsecured loans and favourable terms, helping startups overcome financial barriers that can hold back their growth. With the government backing their loans, startups can focus on innovation and growing their operations without constantly worrying about securing collateral.
If you are considering applying for the Credit Guarantee Scheme, it’s wise to consult a reliable MI member like HDFC Bank. They check if the startup is eligible for the scheme and assess the project’s feasibility and viability. Simultaneously, HDFC Bank also applies for the guarantee cover at the NCGTC portal for the loan. NCGTC issues the guarantee scheme cover if the eligibility parameters are met. So, contact them today to learn more about how the CGSS can benefit your startup.
