Indian startup owners will soon be able to take loans of up to Rs 5 crore without any collateral through a credit guarantee scheme prepared by the government.  

Although the scheme still awaits cabinet approval, it will probably become functional soon. This will happen under the supervision of the Department of Industrial Policy and Promotion.

“The scheme will help us address the most common challenge of all startups: access to funding. The corpus of the fund will also be guaranteed by the government,” said a senior official.

The government is constantly finding ways to boost availability of finance to startups. The credit guarantee scheme also aims to aid the inflow of “venture debt from the formal banking system.”

The government will offer up to 80% risk coverage for the collateral-free credit given to startups by banks.

The department had taken suggestions from stakeholders including VCs, startups, and angel investors to find out ways to enhance availability of credit for startups.

The Startup Action Plan was declared by Prime Minister Narendra Modi in January 2016, which mentioned that a credit guarantee mechanism through the National Credit Guarantee Trust Company or the Small Industries Development Bank of India will have a budgetary mass of Rs 500 crore per annum for the next four years.

The idea of such a fund was to leverage the institutional credit structure to reach out to under served sectors, including Scheduled Castes and Scheduled Tribes and women entrepreneurs.

Startups must meet the criteria defined for them by the department to access any benefit announced in the Startup India Action Plan last year, including loans under the credit guarantee scheme.

The government had relaxed tax conditions for startups in the budget for FY2017-18, allowing companies registered after March 31, 2016, to avail of a three year tax exemption in the first seven years of their existence. Earlier, this facility could be availed only for the first five years.

The government is talking to public sector units to ensure that startups are not excluded from their procurement tendering process for lack of experience.

The department is also monitoring the distribution of money from the fund of funds by SIDBI for startups.

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