Any enterprise needs capital infusion to get started. When you are a start-up, raising funds is one of the major hurdles.
Lenders offering business loans and startup loans do check your credit score during the application process. Having a bad credit score can play out adversely for your loan application. So you should take some time to improve your credit before applying for loans. But in the case of startups, where you have very less credit history and need funds immediately, waiting for your credit score to improve is not feasible.
However, if startup loans are your primary option, you should choose one that gives the best terms for your loan. Research the APR (Annual Percentage Rate) of every loan product to find the one that gives you the best interest rate. You should also factor in various other charges and fees associated with your loan.
It is good to note that the current economic climate offers multiple opportunities for start-ups to raise funds. You can use one of the below alternatives to raise funds for your startup:
Look for Government Schemes: The Govt. of India has a number of financial schemes for startups. Research these schemes to take advantage of them. The Standup India scheme caters especially to startup ventures in India by providing them loans of up to Rs.1 crore. The PMMY MUDRA Yojana is one such scheme where you can borrow up to Rs. 10 lakhs without any collateral or security. There is also the CGS (Credit Guarantee Scheme) that is specially designed for MSME enterprises.
Go for Secured Loans: If you find that unsecured startup loans are proving costlier, you can go for secured loans by pledging some collateral or guarantee against the loan. This will get you loans with favourable interest rates and other terms.
Equity Crowdfunding or Self-financing: This is a non-conventional form of funding where you raise funds through multiple sources like Angel Investors, Self-financing, Friends & Family, Crown Funding, Incubators/Accelerators, etc. There are no strict repayment terms here and the interest rate is also highly negotiable. The risk for the investor is very high here.
Tips:
Do thorough research on the available funding options before you choose one. The government has a number of financial schemes for startups in India. You may land a higher loan amount and lower interest rates when you opt for secured loans. While raising funds for your start-up is an important step, it is also imperative that you choose the right form of funding to avoid any future complications.