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

The scheme is awaiting cabinet approval and is likely to become functional soon under the supervision of the Department of Industrial Policy and Promotion.

“The scheme will help us address the most basic challenge of startups: access to capital. The government is looking at ways to increase availability of finance to startups.

The credit guarantee scheme would help the flow of “venture debt from the formal banking system.” The government will provide up to 80 per cent risk cover for collateral-free credit given by banks to startups.

The department had invited suggestions from stakeholders including startups, venture capital funds and angel investors on ways to increase availability of credit for startups.

The Startup Action Plan announced by Prime Minister Narendra Modi in January 2016 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 corpus of Rs 500 crore per year for the next four years.

The idea of such a fund was to leverage the institutional credit structure to reach out to underserved 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 relaxed tax conditions for startups in the budget for FY2017-18, allowing companies incorporated after March 31, 2016, to avail of a three-year tax holiday 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 startups are not excluded from their procurement tendering process for lack of experience. The department is also monitoring the disbursal of money from the fund of funds by SIDBI for startups.