Complete Guide on Credit Guarantee Schemes for Startups
Complete Guide on Credit Guarantee Schemes for Startups
CGSS (CGSS full form: Credit Guarantee Scheme for startups), a part of the Startup India action plan, is an initiative by the Indian government, to support the startup ecosystem in the country.
New businesses often enter the market with limited assets and face challenges when seeking loans from traditional sources. Securing financial backing can often become a make-or-break factor for their success. In such cases, opportunities such as the Credit Guarantee Scheme for Startups (CGSS) could become invaluable.
CGSS (CGSS full form: Credit Guarantee Scheme for startups), a part of the Startup India action plan, is an initiative by the Indian government, to support the startup ecosystem in the country.
This scheme provides credit guarantees to Member Institutions (MIs), including banks, financial institutions, and non-banking financial companies, to facilitate loans to DPIIT-recognized startups.
One of the scheme's primary goals is to offer collateral-free debt funding to startups, addressing a major hurdle to their growth. Through CGSS, startups can get loans without breaking a sweat over collateral, because who needs collateral when you're changing the world, right?
CGSS serves as a safety net for several budding entrepreneurs, especially during times of economic uncertainty. Following is a complete guide on the Credit Guarantee Schemes for Startups - the eligibility criteria, application process, and advantages.
Eligibility Criteria for Borrowers and Lenders
Borrower Eligibility Criteria:
To benefit from the Credit Guarantee Scheme for Startups (CGSS), borrowers, or startups, should meet the following parameters:
Be officially recognized as a startup by the Department for Promotion of Industry and Internal Trade (DPIIT) through Gazette Notifications.
Maintain a good financial standing by not defaulting on any loans from lending or investing institutions.
Avoid being classified as a Non-Performing Asset as per the guidelines of the Reserve Bank of India (RBI).
Present eligibility certified by the Member Institution (MI) to avail guarantee coverage.
Reach a point where your company can prove its suitability for debt financing by providing audited monthly financial statements over a 12-month period.
Satisfy any additional eligibility criteria prescribed under the CGSS.
Lender Eligibility Criteria:
Lending or investing institutions must adhere to the following eligibility criteria to participate in the Credit Guarantee Scheme for Startups:
Scheduled Commercial Banks and Financial Institutions:
Meet the eligibility criteria specified by the Trust.
RBI Registered Non-Banking Financial Companies (NBFCs):
Possess a minimum net worth of Rs. 100 crore.
Hold a credit rating of BBB and above, as assessed by external credit rating agencies accredited by the RBI.
Please note: If an NBFC's credit rating falls below BBB, it will become ineligible for further guarantee cover until it regains its eligibility.
SEBI Registered Alternative Investment Funds (AIFs):
AIFs focusing on lending or investing are eligible institutions.
Advantages of the Credit Guarantee Schemes for Startups
1. Access to finances:
CGSS simplifies the path to financing for startups, enhancing their ability to secure much-needed capital to support growth.
2. Feasible Funding:
With government-backed guarantees, startups can access loans more cost-effectively, ensuring lower interest rates and reduced borrowing expenses.
3. Variety of Financing Options:
The CGSS scheme offers startups a diverse range of financial options, including working capital, capital expenditure, and fixed asset acquisition loans, providing adaptability in their financial strategy.
4. Catalyzing Growth and Innovation:
CGSS fosters the development and innovation of startups, encouraging entrepreneurship in India and strengthening the startup ecosystem.
5. Government-Promoted Entrepreneurship:
Aligned with the government's vision, the scheme promotes a culture of entrepreneurship and aims to create a conducive environment for the growth of businesses.
Terms of Financial Resources received through the CGSS
Here's a breakdown of the resources and their terms available to startups through the CGSS:
Credit Guarantee Extent:
Startups can receive a credit guarantee of up to 85% of the loan amount, capped at a maximum of Rs. 5 crores.
Credit Guarantee Fee:
There is a fee for the credit guarantee provided under the CGSS. The fee is calculated as a percentage of the loan amount and is paid by the startup to the government.
Single Loan Guarantee:
The credit guarantee provided under the CGSS is designated for a single loan. If a startup requires multiple loans, it must apply for a separate credit guarantee for each loan.
Transaction-Based Guarantee:
For loans sanctioned up to Rs. 3 crore, the transaction-based guarantee covers 80% of the amount in default.
For loans exceeding Rs. 3 crore but up to Rs. 5 crore, it covers 75% of the amount in default.
For loans exceeding Rs. 5 crores and up to Rs. 10 crores, the guarantee extends to 65% of the amount in default.
Umbrella-Based Guarantee:
The umbrella-based guarantee is available to Venture Debt Funds (VDF) registered under AIF regulations of SEBI and covers actual losses or up to 5% of pooled investment, with a maximum of Rs. 10 crore per borrower.
Portfolio-Based Guarantees:
CGSS provides guarantees based on portfolios, each consisting of 10 or more startup loans within a financial year.
Additional Credit Resources:
The scheme offers credit guarantees of up to Rs. 5 crore for various types of loans, including working capital, venture capital, optionally convertible debt, debentures, and term loans.
Micro enterprises seeking loans below Rs. 5 lakh can access up to 85% of their requested credit amount.
MSMEs owned or operated by women and those in North Eastern regions, including Sikkim, can obtain up to 80% credit support.
A guarantee cover of up to 50%, with a limit of Rs. 50 lakh, is provided for MSMEs engaged in retail trade.
How to Apply for the CGSS
Applying for the CGSS involves several essential steps, and here's how you can get started:
1. Register Your Startup:
Ensure your startup is properly registered in India, meeting the legal requirements.
2. Engage in a Qualifying Business Activity:
Your startup should be involved in a business activity recognized by the government of India as eligible under the scheme.
3. Establish a Track Record:
Typically, your startup should have a track record of operations for at least one year to be considered.
4. Demonstrate a Viable Business Model:
Showcase a robust and practical business model with a clear path towards profitability.
5. Meet Financial and Other Standards:
Fulfil financial and other criteria set by the government. This includes demonstrating creditworthiness and maintaining a clean financial history regarding taxes and other financial obligations.
6. Independent Business Entity:
Ensure that your startup operates independently and has not received funding from external commercial borrowings, foreign institutional investors, or venture capital funds.
7. Use the Loan for Business Purposes:
The loan you seek should be directed towards qualifying business purposes, such as working capital, capital expenditures, or acquiring fixed assets.
Both public sector and private sector banks come under the CGSS. Bank of Baroda, Canara Bank, Indian Overseas Bank, State Bank of India and Bank of India are some of the public sector banks under the scheme. Axis Bank Ltd., ICICI Bank Ltd., IDBI Bank Ltd., RBL Bank and Kotak Mahindra Bank Ltd. are some of the private sector banks under the CGSS.
It's important to note that the specific eligibility criteria may vary depending on the lender and the specific loan product you're interested in. When applying, you'll need to provide certain documentation, and for Know Your Customer (KYC) requirements, resident partners or directors must submit UID/Adhaar details, while non-resident partners or directors should provide passport numbers.
Lending institutions participating in the CGSS can be Alternate Investment Funds (AIFs), scheduled commercial banks/financial institutions, or NDFCs registered with the RBI. The scheme operates in accordance with the National Credit Guarantee Trust Company (NCGTC) trusteeship management terms. Member lending institutions can offer guarantees of up to Rs. 500 lakh to eligible startups, all without requiring third-party guarantees or collateral.
Conclusion
The objectives of the CGSS scheme are clear and purposeful. The scheme strives to be the wind beneath the wings of startups, supporting their growth and development in India by streamlining their access to essential financing. This will be achieved by lowering the risks faced by lenders when extending loans to startups, ultimately encouraging them to invest in businesses.