Why Every Startup Should Know About the Credit Guarantee Scheme in India

For many startups in India, gaining access to formal credit can feel like an uphill task. Banks often require collateral, whereas new ventures typically begin without assets to pledge. This gap leaves many entrepreneurs relying on personal savings or informal borrowing. Yet, financial growth cannot depend on such limited sources.

Startups need structured support that allows them to secure funding with confidence. This is where a guarantee scheme becomes vital. It enables young businesses to access collateral-free loans, allowing them to focus on building their operations.

For a country with one of the world’s largest startup ecosystems, such initiatives can make the difference between ideas staying on paper and ventures scaling successfully.

What is the Credit Guarantee Scheme for Startups?

The Credit Guarantee Scheme for Startups (CGSS) is designed to make institutional lending more accessible to startups. It provides a scheme covering loans of up to ₹10 crore taken by eligible startups. The guarantee is issued through the National Credit Guarantee Trustee Company (NCGTC).

Under this system, the guarantee does not go directly to the borrower. Instead, it is provided to the Member Institutions (MIs) such as banks, NBFCs, and alternative investment funds. These institutions lend to startups with greater confidence, as their risk is mitigated.

Why the Guarantee Scheme Matters for Startups

India has more than 1.12 lakh DPIIT-recognised startups spread across 763 districts, making it the third-largest startup ecosystem globally. Yet, many of these ventures struggle to raise debt due to a lack of collateral. The guarantee scheme addresses this barrier by providing access to credit.

With this government scheme for businesses, startups gain access to collateral-free loans. It creates financial independence, reduces dependency on personal savings or informal borrowing, and supports entrepreneurial ambition across diverse sectors.

Benefits of the Credit Guarantee Scheme

The scheme provides several advantages that help startups access funding with ease and build their growth journey, such as:

1. Collateral-free Loans

The most attractive benefit is the absence of a collateral requirement. Most startups bootstrap their way in the early stages and cannot pledge assets. The guarantee scheme bridges this gap by backing loans up to ₹10 crore without demanding collateral.

2. Nominal Guarantee Fee

The cover is available against a small annual fee. The rate is generally 2% of the sanctioned or outstanding loan amount. For women-led startups and units from the North-East, it drops to 1.5%. The MI may pass on this fee to the borrower, but it remains nominal compared to the access it creates.

3. Flexible Credit Facilities

Loans under CGSS are not restricted to one type. They can take the form of venture debt, working capital, term loans, subordinated debt, debentures, or even optionally convertible debt. Non-fund-based facilities that later become debt can also be covered. The guarantee scheme is available in both transaction-based and umbrella-based formats, making it flexible for different business needs.

4. Support from Member Institutions

The startup does not need to manage the process with NCGTC directly. The lending institution applies for the guarantee cover on behalf of the borrower. This simplifies the process and ensures professional assessment of eligibility and feasibility.

Eligibility Criteria for Startups

To qualify under the guarantee scheme, startups must:

1. Be recognised by the DPIIT under its official notification.
2. Have no record of default with any lending or investing institution.
3. Not classified as a Non-Performing Asset as per RBI guidelines.
4. Demonstrate financial stability through audited monthly statements of at least 12 months.
5. Meet any additional conditions prescribed under the scheme.

Holding or subsidiary companies are not eligible. Similarly, entities incorporated outside India or those where Indian promoters hold less than 51% stake are excluded.

Where Can Startups Apply?

Startups can apply for credit facilities under this government scheme for business through:

• Scheduled commercial banks, including leading names like HDFC Bank.
• RBI-registered NBFCs with a net worth of at least ₹100 crore and a minimum credit rating of BBB.
• SEBI-registered Alternative Investment Funds.

Currently, 11 public sector banks, 7 private banks, 3 NBFCs, 1 foreign bank, 1 small-finance bank, 1 AIF, and 1 financial institution are active participants.

Tenure and Loan Enhancements

For transaction-based loans, the guarantee cover starts from the date of fee payment and lasts through the loan tenure. In umbrella-based cases, it extends through the life cycle of the venture debt fund.

Existing loans under the guarantee scheme can also be enhanced, though the maximum limit remains capped at ₹10 crore per borrower.

Why Startups Should Consider the Guarantee Scheme

A government scheme for businesses like CGSS does more than provide funding. It helps startups build credibility with formal financial institutions. Regular repayment under the scheme creates a strong credit history, which opens doors to further funding.

It also supports inclusivity. Lower fees for women-led startups and ventures in the North-East bring balance and diversity to the entrepreneurial ecosystem.

Finally, the wide range of credit facilities it covers makes the guarantee scheme suitable for businesses at different stages, from seed to growth.

 

A Government Scheme for Business Growth

The guarantee scheme for startups is more than just financial support; it also provides valuable guidance and mentorship. It gives early-stage ventures the freedom to grow without the burden of collateral. For India’s fast-growing entrepreneurial ecosystem, it is a vital government scheme for business that strengthens confidence, boosts credibility, and builds resilience.

For founders, understanding this opportunity can make the difference between struggling for credit and accessing growth capital on time. Startups can access this facility through trusted financial institutions, including HDFC Bank, allowing them to focus on turning their ideas into thriving businesses.

 

Source:

https://www.jpmorgan.com/insights/treasury/integrated-receivables/what-is-working-capital-formula-and-how-to-calculate-it