Credit Guarantee Scheme for Startups - A prelude

In this dynamic world of startups, they often face many challenges while scaling up like Funding, Customer acquisition and retention, Execution , Market fit and Competition. To successfully navigate through these challenges, it requires a lot of strategic thinking, adaptability, sustainable partnerships and ability to raise funds timely. We will speak here on the last one i.e. capital funding

There are multiple ways a startup can raise funding depending upon the stage of the startup and uniqueness of the business. This can be equity capital through pre seed, seed, angel, Pre series A and so on. It can also in the form of debt capital, by way of convertible notes, venture debt, promoter funding, government initiatives through the banking system. Here, we will discuss specifically the government initiatives on this important part of a startup’s journey. One such pivotal initiative in India currently is the Credit Guarantee Scheme for startups, (CGSS) conceptualized by the government and designed to provide financial support and stability to the growth startups.

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The Credit Guarantee Scheme for Startups :

The Credit Guarantee Scheme (CGS) is a government initiative aimed at facilitating easier access to credit for startups covered under the extant government rules defining such startups. It operates on the principle of guaranteeing a significant portion of the loan amount extended to startups by lending institutions such as banks and financial organizations without any need of hard collaterals which is otherwise a compulsory requirement for availing multiline limits from the financial institutions. Through CGSS, the government aims to mitigate the risk perceived by lenders in extending credit to startups, which are often considered high-risk borrowers due to their early-stage operations and limited financial history as well as non-availability of security for collaterals

Eligible Borrowers :

?The eligibility criteria for an entity to borrow under the Credit Guarantee Scheme for Startups shall be as follows, wherein an entity should be:

• Startup as recognized by DPIIT as per Gazette Notifications issued from time to time, and
• Startups that have reached stage of stable revenue stream, as assessed from audited monthly statements over a 12-month period, amenable to debt financing, and
• Startup not in default to any lending/investing institution and not classified as Non-Performing Asset as per RBI guidelines, and
• Startup whose eligibility is certified by the member institution for the purpose of guaranteed cover.

?Eligible Lending Institutions :

?The eligibility criteria for the lending institutions also called the Member Institutions under the Credit Guarantee Scheme for Startups are:

• Should be Scheduled Commercial Banks and Financial Institutions,

• An RBI registered Non-Banking Financial Companies (NBFCs) having a rating of BBB and above as rated by external credit rating agencies accredited by RBI and having minimum net worth of ?at least INR 100 Crores can also be an eligible Member Institution
• However, it may be noted that in case an NBFC subsequently becomes ineligible, due to a downgrade in the credit rating below BBB, or by an erosion in the networth below the minimum networth required, such an NBFC shall not be eligible for further guarantee cover till upgradation again to eligible category.
• SEBI registered Alternative Investment Funds (AIFs).

?Modus Operandi of the CGSS :

• Guarantee Mechanism: Under the CGS, the government or a designated agency guarantees a certain percentage (typically ranging from 75% to 85%) of the loan amount sanctioned by the lender to the startup. This guarantee acts as collateral for the lender, reducing their risk exposure. The cost of the cover which is paid by the Member Financial Institution by way of Guarantee Fee to the Credit guarantee fund, is eventually passed on to the borrower by adding it to the final lending rate. However this Guarantee fee cost is negligible as compared to the benefits it brings to the startup ecosystem.
• Eligibility Criteria: Startups seeking to avail themselves of the CGSS typically need to meet specific eligibility criteria set by the Government as well as the financial institutions. These criteria may include the startup’s age, sector of operation, business model viability, and adherence to regulatory requirements. The scheme operates through partnerships with various financial institutions. Participating lenders evaluate loan applications as per their standard credit assessment norms while taking into account the government's guarantee.
• Use of Funds: Startups can utilize the sanctioned loans for various purposes critical to their growth, including working capital requirements, capital expenditures, technology adoption, marketing initiatives, and expansion plans.

?Benefits of CGSS to the Startup Ecosystem :

?Enhanced Access to Finance: The CGSS enhances startups’ access to formal credit from the banking system which is crucial for scaling operations and seizing growth opportunities.

• Better Credit Terms: Since the scheme reduces the risk for lenders, startups can often negotiate more favorable terms such as better interest rates and longer repayment periods.
• Boost to Entrepreneurship: By facilitating financial stability and fostering an enabling environment, the scheme encourages entrepreneurial spirit and innovation across diverse sectors.
• Stimulating Economic Growth: Startups, being key contributors to job creation and economic dynamism, play a significant role in driving overall economic growth. The CGSS supports this by nurturing a conducive financial ecosystem for the startups

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The Credit Guarantee Scheme stands as a cornerstone initiative in empowering startups by addressing their fundamental financial challenges. By providing a safety net for lenders and fostering an environment conducive to entrepreneurial ventures, the scheme contributes significantly to economic development and innovation. As governments and stakeholders continue to refine and expand such initiatives, the potential for startups to thrive and contribute meaningfully to global economies grows exponentially by leveraging such innovative government initiatives without diluting their cap table stakes too much and too early .

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