Startup business loans are essential for any new business venture. Startup business loans are available in market. However the process to avail startup business loans varies from one lender to another. In this post I am providing a complete guide on startup business loans.
What is a startup?
A startup is an entity that is in the initial stages of business. Founders normally finance their startups and may attempt to attract investors before they get into growth stage. Funding sources include family and friends, venture capitalists, crowdfunding, and startup business loans. Startups carry high risk as it is in early stage of business and chances of failure is also very high. But they also carry potential to grow by providing unique service or product with innovation and technology.
Type of startup business loans
Any business venture requires capital to run the business. This capital can come either from the promoter/owner of the business. Alternatively it can be raised as loan from financial institution or public. It is not possible to fund business from own source throughout, especially at growth stage. Essentially all startup raise capital by way of loan at some point for growth. Therefore startup business loans is high on demand. The startup business loans can be divided into two types – term loan and working capital loan.
Term loan
As the name suggest it is a loan given for long period say 3 to 10 years. The main purpose of term loan is to acquire assets/equipment or set up the business. Term loan is repaid in either monthly or quarterly instalment along with interest. It is paid out of the profit generated by the business. Till the loan is repaid, the assets of the business or any other assets as stipulated by the sanctioning financial institution will remain as security.
Working capital loan
This loan is given for day to day operation of the business. Once the loan is sanctioned, a separate account is created from which the borrower keep drawing the money as and when required. The borrower when receive any money from its business pay it back into this account. Interest accrued on outstanding loan is adjusted from the money deposited in the account. Generally, working capital loan is granted for 12 months.
At the end of this period the loan is reviewed and allowed to utilise for another 12 months or discontinued. In other words, it is a revolving loan. The sanctioning authority stipulate collateral security in the form of land, building, FD etc. for such loan as it does not create any long term assets.
Overdraft loan
Apart from above two, startup business loans can be in the form overdraft as well. It is a type of working capital loan. This facility enable the business owner to avail a loan against a valuable asset, property, or accounts receivable to fund specific projects, events, or operations. The asset or property is mortgaged to the lending institution for the term of the loan while accounts receivables are hypothecated or transferred to the lender to appropriate against the loan.
These loans attract higher rate of interest as compared to other types of loan. This type of facility has to be repaid in single instalment or in 2/3 large instalments. Generally, tenure is maximum 3 years.
Eligibility to obtain startup business loans
The eligibility criteria to grant startup business loans varies from institution to institution. The major criteria are around the following.
Age – In case of individual, this requirement is usually 18 years and above. In case of a business, this requirement may be 2 or 3 years of existence of the business. However, new startup business loans are also granted in which case the age limit would apply to the proposer / founder of the business.
Capacity to Pay – This means the borrower should be able to prove that he can repay the loan within the stipulated time. Proof of capacity to pay may comprise of –
- The business model, prospect of the product or service.
- The projected profitability and return on investment estimated
- Management experience and expertise – qualification of the entrepreneur or hired talent
- Financial track record of the applicant or credit score and credit rating
- The capability or security to pay back the loan
- Capacity to pay is further strengthened by the collateral offered and guarantor.
Steps to obtain startup business loans?
Entrepreneurs with a profitable business idea may first prepare project report on the business idea. This report will work as a roadmap towards the ultimate goal. It covers a thorough assessment of
a) promoter background, credibility and capability,
b) technology to be adopted, its adequacy, utilities required etc.
c) marketing, pricing, competition, production innovation, future prospect
d) Investment estimate, financial viability. It prepares complete working showing the projected returns for the next 3 to 5 years with supporting documentation of how this target would be achieved.
e) Assessment of environmental impact, if any.
The next steps is approaching bank or financial institution with duly filled out application form, project report and all supporting documents. In General the following documents are required.
- Company incorporation certificate or partnership firm deed or proprietorship firm registration.
- Permanent Account Number (PAN) card of promoter. If business is in the name of any farm or company, then PAN should be in the name of the entity.
- Trade license
- Shop and establishment license
- Goods and Service Tax registration
- Udyami Registration Certificate
- Power sanction letter
- Pollution control certificate
- No Objection Certificate from local authority
- Digital signature and Director Identification number, if comapny
Schemes for start-up business loans
In order to encourage Micro, Small, and Medium Enterprises (MSMEs) sector and uplift the marginalized section of society, the government has empowered banks to offer start up loans to budding entrepreneurs.
There are several government schemes to aid start-ups such as Start-up India, Make in India, Digital India, TREAD (Trade Related Entrepreneurship Assistance and Development), TReDS (Trade Receivables Discounting System) which help MSMEs set up and conduct business.
Credit Guarantee Fund Trust for MSMES (CGTMSE) scheme offers loans up to ₹5 crore without any collateral. Similarly, SIDBI (Small Industries Development Bank of India) offers many products to support MSMEs.
SIDBI also oversees the Sustainable Finance Scheme, which aims to provide financing to businesses that deal in green energy, renewable energy, technical hardware, and non-renewable energy. This programme was created by the government to support the whole value chain of clean production/energy efficiency and sustainable development initiatives.
Process to apply for startup business Loans
Here are some ways to apply for an entrepreneurial loan:
- Apply online by visiting the official site of the lender you want to get a loan, filling out the form and submitting the documents needed.
- Visit the nearest branch and apply for your loan application and supplementary documents.
- Also, you can call the lender’s customer service for assistance.
When applying for a startup business loans, keep the following points in mind:
- There is no overdue with any lender for your existing loans including credit card.
- Your credit score is above average
- Choose your lender carefully if you need a business loan.
- Do not apply for more than one loan.
- Apply for a loan amount that you are confident you will be able to repay on time.
- Maintain financial statements that have been audited.
- Obtain all relevant permissions and approvals.
- Tie up for money that has to be brought in from your side.
If you have any query on startup business loans or need any help do let us know in comments. Our team will guide you.