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About Loans for Startup Business

Not all entrepreneurs and innovators can fund their own enterprise. Most businesspersons require outside finance to set up shop. There are many options available for such individuals. From taking a simple, collateral free personal loan to hypothecating personal assets such as gold or property, there are many says to source the initial venture capital for your startup. Most banks and several NBFCs offer specific loans for startups with competitive rates of interest.

Startup loans are offered to sole proprietorships, partnership firms, LLCs, and limited companies. The terms of the loan depend on several factors including -

  • The amount of loan requested
  • The term of the loan
  • The type of business
  • The credit history of the applicant
  • The projected profits, targets, and goals
  • The business model
Loans For Startup Business
Loans for Startup Business

Types of business loans

Banks offer business loans for setting up new ventures – loans for startups – as well as loans for working capital, loans for equipment, and other specific business needs.

The following are generally the type of business loans offered by banks and NBFCs -

  • Term loans :

    Term loans are loans given for long periods – usually 1 year to 10 years. The loans are generally for large amounts, utilized for launching a new business, purchasing equipment, or funding projects. These loans are generally offered against collateral, and many institutions require a guarantor in addition to the collateral – though some will accept a guarantor in place of collateral.

  • Working capital loans :

    As the name suggests, these loans are for the specific purpose of funding working capital of a business. Some businesses require working capital throughout the year while others need large amount of working capital during certain periods. Retailers, partnerships, or companies can substantiate their existing working capital by taking a loan to tide over for a short period. As such, working capital loans are usually taken for a short time and often without any collateral.

  • Asset-based loans :

    These are loans taken against a valuable asset, property, or accounts receivable to fund specific projects, events, or operations. The asset or property is hypothecated to the lending institution for the term of the loan while accounts receivable are transferred to the lender. These loans attract higher rate of interest as compared to other types of loan.

Interest Rate and Other Loan Charges

Interest is the amount the borrower pays for utilizing the lender’s money for the specified term. Rate of interest varies from bank to bank and product to product. It may also vary with loan amount, term, and borrower’s credit history among other factors.

Most institutions charge either a fixed amount or a small percentage of the loan amount as processing fee. This fee is applied to pay the employees of the lender and maintain its assets.

While applications may be made for startup loans up to 1 crore, the actual limits and amount of loan approved varies from institution to institution and application to application.

Most institutions allow pre-closure – that is they allow the borrower to repay the loan in full before the end of the term. However, some may charge a small penalty for pre-closure before expiry of a certain period – usually 1 year.

Eligibility criteria to obtain loans

Any Indian resident above 18 years of age may apply for a business startup loan. However, banks do take into consideration several factors at the time of loan approval. Broadly, these factors include –

Age – In case of individual, this requirement is usually 18 or 21 years. In case of a business, this requirement may be 2 or 3 years. However, loans are also granted for startups in which case the age limit would apply to the proposer / founder of the business. Lenders demand proof of age such as birth or matriculation certificate.

Domicile – Domicile or residence in India is required for business. Most lenders offer loans for startups only to Indian residents. The applicant must be able to submit proof of residence such as passport, driving license or Aadhar card.

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
  • The projected return on investment
  • 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 you supply and your guarantor

Different loan schemes for startups

Micro, Small, and Medium Enterprises (MSMEs) have long been recognized as the driving force of the economy. In order to encourage this sector and uplift the marginalized section of society, the government has empowered banks to offer startup loans to budding entrepreneurs.

There are several government schemes to aid startups such as Startup 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.

In a more recent endeavor, the Credit Guarantee Fund Trust for MSMES (CGTMSE) scheme offers loans of up to 1 crore without any collateral. Similarly, SIDBI (Small Industries Development Bank of India) offers many products to support MSMEs.

Entrepreneurs may approach any bank with a business proposal, business model, and projected ROI statistics to discuss the amount of loan available, the interest rate, and other loan terms.

What should you do to obtain Funding for an Startup?

Entrepreneurs with a salable innovation or market gap may design a business model and plan to manufacture the product or market their services. You should also prepare a sheet showing the projected returns for the next 3 to 5 years with supporting documentation of how this target would be achieved.

You can then approach a bank with a duly filled out application form and all supporting documents. Please visit the website of the respective bank you wish to approach for a complete list of required documents and procedure for application.

Most bank websites also have an online EMI calculator tool that will help you work out the EMI for different loan amounts and terms. This will give you an idea about your repayment plan, which you can present, to the lender at the time of discussion.

Some of the more popular banks that offer loans for startups include -

  • Bank of Baroda business loans
  • Citi Bank business loans
  • HDFC Bank business loans
  • ICICI business loans
  • SBI business loans

Several banks and NBFCs offer business startup loans. Each product has its own criteria and terms. It is advisable to visit the websites of several banks and make multiple computations by entering various loan amounts, terms, and interest rates into their EMI calculator before deciding upon the lender and loan amount.

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