Ever since the Startup India campaign was announced in the year 2015, the number of new Micro, Small & Medium Enterprises (MSMEs) has been on the rise. The campaign is based on the action plan aimed at promoting bank financing for Startups . It has also encouraged the startups, which will eventually lead to more job creation and shall help in the nation’s economic growth.
Startup Business Loans: Eligibility Criteria
- The firm should have a detailed and convincing business plan
- The startup to be formed must be a private limited company or a limited liability partnership
- Total turnover of the firm should not exceed Rs. 25 crore
- The company should have approval from the Department of Industrial Policy and Promotion (DIPP)
- The startup must get patron guarantee from the Indian patent and Trademark Office
- The company must have recommendation letter by an incubation
Types of Startup Business Loan
Mudra scheme is most popular among the youth of India. Micro Units Development and Refinance Agency (MUDRA) loan scheme is a Government initiated scheme which is categorized under 3 loan schemes named as Shishu, Kishor and Tarun. Under Mudra’s Shishu scheme interested applicants can get loan up to Rs. 50,000, whereas under Kishore scheme the amount ranges between Rs. 5 lakh to Rs. 10 lakh. It is up to Rs. 10 lakh, if the applicant opts for Mudra’s Tarun loan scheme.
Credit Guarantee Funds Trust for Micro and Small Enterprises (CGTMSE) is another Government initiative that offers funding to MSMEs via financial institutions like banks and NBFCs. Under this scheme first time entrepreneurs and startup enterprises are majorly benefitted. The loan offered under CGTMSE scheme is collateral free.
Under this type of funding, the equipment that is bought when starting the business is kept as collateral with the bank, thus enabling the lender to charge a relatively low rate of interest with slightly higher risk. The borrower is expected to repay the loan amount used to purchase the equipment as revenues that are generated from their business. The main benefit of equipment financing loan is that the depreciation of the equipment can be used by the customer as a tax benefit for many years.
Business Installment Loan
Business installment loan is offered by many of the leading banks such as Standard Chartered and ICICI Bank. This lets borrower address with immediate cash and expansion needs. This broadly falls under the category of personal loans and similar to personal loans, it is an unsecured loan. However, banks offer secured version of this loan at lower interest rates.
Growth Capital and Equity Assistance Scheme by SIDBI
Entrepreneurs can now avail this distinct type of loan for their start up from the banks. Many banks and financial institutions offer loan schemes that are specifically designed to fund startups and their special needs. Different banks may assign different names for these Startup Business Loans. For instance, SIDBI offers “Growth Capital and Equity Assistance” schemes that can be used for purposes like business expansion, buying machinery, purchasing raw materials, marketing, brand building, creation of distribution network, R&D, software purchases, etc. Similarly, there are several other banks that provide funding for startups.
Benefits of Startup Business Loans from Banks
Availing a business loan from banks for a startup can be advantageous in many ways, as compared to availing funds from some other financial institutions. Benefits of Startup Business are the following:
- The new entrepreneurs are granted tax relief for 3 years
- Funds from venture capitals are quite expensive for a startup with investors of venture capital asking for as much as 5 to 10 times of the return on their investment. However, a bank loan does not require any equity dilution and the rate of return to the bank is fixed at a nominal interest rate
- Banks are easier to approach. With plenty of banks available in India, it is simpler to approach local banker and request for funds
- Banks in India have an established and well-structured framework for processing the funding request of entrepreneurs. Therefore, loan request will be processed more quickly compared to capitalist investors
- Another significant benefit is that the profit (as well as the loss) of the business belongs only to borrower. Borrowers are not answerable to the bank about the profit and loss of their businesses
Getting loans from banks and NBFCs sometimes seem difficult for many startups. However, there are several other funding options available as well. Some of them are listed below:
Crowdfunding has become a popular way for small businesses to raise money, thanks to various websites such as Kickstarter and Indiegogo, which helps borrower to procure funds through online campaigns. Instead of paying back donors, one can choose to give them gifts, which is why this system is also called rewards crowdfunding. Besides this reward method, new avenues are also opening up for equity crowdfunding, in which borrower tap a public pool of investors who agree to finance his/her small business in exchange for equity ownership. This became an even broader option recently with new securities regulations that allow small-business owners to reach out to “mom-and-pop” investors – a concept from developed economies that is gaining traction in India. Crowdfunding is also extremely helpful for entrepreneurs who have a product or product idea and want to test the market for it. It gives the option to later validate the opportunity, if it presents itself.
Many new small-business entrepreneurs access financing through personal loans, often via a growing number of online and offline lenders when they are unable to avail funding from banks or investors. But like credit cards, personal loans usually have high rates of interest, especially for borrowers with poor credit rating. The minimum credit score to be maintained should be more than 750 to get loan at lower interest rate. For those that do, the bank or institution will fund loan fast, often within a week.
Grants from private foundations and government agencies are another way to raise startup funds for small business. They are not always easy to get, but free capital might be worth the hard work for some new businesses. Entrepreneurs have to prepare a business proposal and then present it before the agencies they desire to raise fund from. If the private foundations and government agencies like the plan, they may approve the fund.
Micro Loans from NPOs and NGOs
Micro-lenders and non-profit lenders can be a less difficult route, especially if one have unreliable financing sources. These lenders primarily focus on minority or traditionally disadvantaged Small and Medium Enterprises (SMEs), as well as small businesses in communities that are struggling economically. Raising funds from such a source may take 3 to 4 weeks for the application to be processed. Each lender usually has targeted businesses that they lend to and if one qualify, loan may be sanctioned without any demands for high returns.
Things to remember:
Prior to approaching a banker or investors with a request for funding, applicant must prepare a proposal that explains the business model, promoters’ background, revenue model, estimated sales, estimated growth rate, estimated profits and so on. In short, the proposal must comprise everything related to the business. Startup business borrowers can meet their borrowing requirements and avail the best possible terms, if they approach financial institutions in an appropriate manner. Applicant must clearly understand the various criteria that banks employ to screen, rate and process their loan applications and the importance of furnishing precise and correct information.
What Banks Need to Know About the Startup Business and Entrepreneurs?
It is advisable for entrepreneurs to be as open and transparent with their bankers or financial advisers as they can. This will enable the banks to get the necessary information and the business to give appropriate advice. Withholding important information, such as possible liabilities with other lenders or the fact that business owners have already pledged assets will inevitably cause difficulties, even if it is at a later stage. Then, business owners will have only wasted the time and probably closed the door to future dealings with the bank. Banks may need things like a letter of introduction, applicant’s profile and business profile, business’s brochure, bank and other references, and proof of company ownership and registration.
Frequently Asked Questions (FAQs)
Q. What is the purpose of Start-up Business Loan?
Ans. Startup business loan basically caters to the main funding of a business which you wish to start. The Startup can be of anything and a loan for this will only boost your business initially giving the necessary machinery and equipment to your start up.
Q. What are the Government based start-up business loans offered in India?
Ans. Some Government based start-up business loans in India are
- CGTMSE Scheme
- Mudra Loan
- Bank Credit Facilitation Scheme
- National Bank for Agriculture and Rural Development (NABARD)
Q. How to qualify for government based start-up business loan?
Ans. There are certain requirements that one must fulfill in order to apply for a start-up business loan:
- Minimum age of the applicant should be above 18 years and not more than 65 years
- Good Credit/CIBIL score and repayment capacity
- Valid and authentic documents to be submitted
- Indian citizen with no criminal record
- Should not have defaulted on any availed loan or credit card
Q. What is the loan amount that can be availed through a Business Startup Loan?
Ans. The minimum and maximum loan amount depends on the financial lender you choose and the requirement that you have. The minimum loan amount can start from Rs. 50,000 and the maximum loan amount can be decided as per the terms and conditions of the financial lender.
Q. What are the things to compare before applying for Startup business loan?
A. Few things to keep in mind before applying for a start-up business include the interest rate, processing fees, service charges, penal charges, prepayment or foreclosure charges, etc.
Q. Can Startups get a loan without submitting any collateral?
Ans. There are some business loan schemes that provide loans without a security, Mudra and CGTMSE are loan schemes where one does not need to provide any asset as a security before applying for a business loan.
Every startup enterprise needs financing, particularly at its initial stage. Financing is required to help startups set up and expand their operations, to develop new products, market their services, etc. India has a well-developed financial system comprising of banks, NBFCs and venture capital companies. All these institutions cater to the diverse financial needs of the startups, as well as existing businesses. Several schemes are being implemented by various financial institutions to cater to the financing needs of the MSMEs.