The Credit Guarantee Scheme for Startups (CGSS) aims to provide credit guarantees to loans extended by Member Institutions (MIs) for financing eligible borrowers, specifically startups. These startups are defined in the Gazette Notification issued by the Department for Promotion of Industry and Internal Trade (DPIIT) and are amended from time to time1.
Here’s an overview of the scheme:
- Objective: The CGSS ensures that startups have access to credit by offering a credit guarantee up to a specified limit.
- Eligible Borrowers:
- Startups: These are recognized by DPIIT based on Gazette Notifications. Additionally, startups should have reached a stage of stable revenue stream, as assessed from audited monthly statements over a 12-month period. They should also be amenable to debt financing and not in default to any lending/investing institution or classified as a Non-Performing Asset according to RBI guidelines.
- Lending/Investing Institutions (MIs): These include Scheduled Commercial Banks, Financial Institutions, RBI-registered Non-Banking Financial Companies (NBFCs) with a rating of BBB and above, and SEBI-registered Alternative Investment Funds (AIFs).
- Operational Mechanism:
- The CGSS does not directly provide guarantee cover to startups. Instead, it operates through a Trustee (NCGTC), which in turn provides guarantee cover to MIs that extend loans to startups.
- The instruments of assistance can take various forms, including venture debt, working capital, subordinated debt, debentures, optionally convertible debt, and other fund-based or non-fund-based facilities.
- The credit guarantee cover can be either transaction-based or umbrella-based.
- Registered Member Institutions (MIs): As of September 12, 2023, there are a total of 25 registered MIs, including Public Sector Banks, Private Sector Banks, Foreign Banks, Small Finance Banks, AIFs, Financial Institutions, and NBFCs.
Application Process
Entrepreneurs seeking financing through a credit guarantee scheme typically need to follow a structured application process, which may involve the following steps:
- Research and Preparation: Research available credit guarantee schemes and assess their suitability based on your startup’s needs and eligibility criteria. Prepare necessary documentation, including business plans, financial statements, and incorporation documents.
- Selection of Lender: Identify participating lenders that offer loans supported by the chosen credit guarantee scheme. Evaluate loan terms, interest rates, and repayment options to select the most suitable lender for your startup.
- Application Submission: Submit your loan application to the chosen lender, providing all required documentation and information. Ensure accuracy and completeness to expedite the evaluation process.
- Evaluation and Approval: The lender will assess your application, considering factors such as creditworthiness, business viability, and compliance with eligibility criteria. If satisfied, the lender may approve the loan with the backing of the credit guarantee scheme.
- Loan Disbursement: Upon approval, the lender will disburse the loan amount to your startup’s account, allowing you to utilize the funds for business purposes as outlined in your loan agreement.
- Repayment and Monitoring: Repay the loan according to the agreed-upon terms and conditions, keeping track of repayment schedules and fulfilling obligations to maintain a positive relationship with the lender and credit guarantee scheme provider.
In summary, credit guarantee programmes for new businesses are essential for expanding entrepreneurship and making funding more accessible. These programmes support innovation, the development of jobs, and economic growth by giving lenders a safety net and helping businesses get past financial obstacles. To fully utilise this important resource to support their startup endeavours, entrepreneurs need investigate the various credit guarantee programmes that are available, comprehend the prerequisites for eligibility, and successfully complete the application procedure.