As of 29 August 2022, India has emerged as the world’s third-largest startup ecosystem, with over 77,000 startups recognized by the Department for Promotion of Industry and Internal Trade (DPIIT) spread across 656 districts.
Finance is the lifeblood of any organisation. No organisation, and especially a start-up, can function without adequate funds. It becomes even more critical when you have just started your business or are about to start one.
A startup business loan from a bank or financial institution might help you borrow capital to start your firm or grow your current one.
Let us understand how one can raise the finance required for running a new business and schemes that the government has initiated regarding the same.
What are New Business Loans?
A new business loan from a financial institution or bank helps you borrow capital to start your firm or grow your current one. Financial institutions and banks offer financial help to businesses at all stages of their development. Depending on their needs, startups can obtain various term loans, working capital, or asset-backed loans. You can apply for loans for starting a new business in India from banks and non-banking financial companies (NBFCs). Each corporation, bank and NBFC has its own interest rates, tenures, schemes, terms and conditions.
Features of a New Business Loan
- Simple Documentation: You only need to provide a few simple documents to your direct sourcing agent or bank official, who will then verify and approve your loan.
- Rapid Loan Approval: When you match the qualifying criteria and provide the relevant documents, your job is almost complete, and the loan is usually approved within 2 to 3 working days.
- No Collateral: A new business loan does not require you to pledge assets as collateral security against them.
- Flexible Repayment: The repayment period for startup business loans is flexible.
- Profit Sharing is Not Required: Another helpful feature of obtaining a new business or start-up loan is that you will not be required to split your profits with the bank/lending institutions. Your gains are solely yours. In contrast, if your company is sponsored by venture capital or an angel investor, you must incorporate them into your company profits.
- Relatively More Affordable: A bank loan does not necessitate any equity dilution, and the bank’s interest rate is fixed at a nominal interest rate, making it relatively cheaper when compared to venture capital funds, which are highly expensive for a start-up.
(The steps mentioned above are very general and subject to change depending on the Banks and NBFCs internal policies)
Indian Government Business Loans for New Businesses
Among middle-income nations, India ranks second in terms of innovation quality. It also ranks highly when it comes to scientific publication quality and university quality.
The Government of India aims to encourage the spirit of entrepreneurship and self-reliance to reduce our country’s dependency on goods and services from other countries. It is vital that an organisation has access to adequate funds to meet its working and fixed capital requirements. Therefore, the government launched startup business credit schemes to meet the needs of startups and Micro, Small and Medium Enterprises (MSMEs). The Small Industries Development Bank of India (SIDBI) has also begun lending directly to startups and MSMEs rather than through banks.
The following are some of the most noteworthy and popular initiatives offered by the Indian government to startups and MSMEs:
Bank Credit Facilitation Scheme
The National Small Industries Corporation (NSIC) is in charge of this scheme. It is intended to address the business finance needs of MSME entities. The NSIC has partnered with several banks to provide loans to MSME firms. It gives MSMEs hands-on assistance at no cost.
Under this scheme, credit is made available through an integrated mix of public and private sector institutions. It also allows MSMEs to apply for a new bank loan or transfer an account to a different bank as part of tie-up arrangements. It also helps MSMEs complete the documentation requested by the bank and after submitting it to the bank, the NSIC officer follows up with the bank.
Pradhan Mantri Mudra Yojana (PMMY)
The Micro Units Development and Refinance Agency (MUDRA) is in charge of this scheme, which was started in 2015. Its primary goal is to provide business loans to all types of companies in the manufacturing, trading, and service industries.
This scheme provides loans ranging from ₹50,000 to ₹10,00,000 in three different categories: Shishu, Kishor, and Tarun. These loans can be used to start a new business by artisans, vegetable vendors, machine operators, retailers, repair shops, and others.
Credit Guarantee Scheme (CGS)
This credit is available to new and current MSMEs engaged in service or manufacturing operations, except for educational institutions, agricultural, retail trade, Self Help Groups (SHGs), and others. This scheme is led by the Credit Guarantee Fund Trust for Micro and Small Enterprises and aims to provide collateral-free credit to micro and small firms.
Stand Up India
The Stand Up India Scheme provides bank loans ranging from ₹10 lakh to ₹1 crore to at least one scheduled caste (SC) or scheduled tribe (ST) borrower and at least one woman per bank branch for the establishment of a greenfield firm. This business could be in manufacturing, services, or trading. In the case of non-individual firms, an SC/ST or woman entrepreneur must possess at least 51% of the shareholding and controlling stake.
IREDA NCEF Refinance Scheme
The Indian Renewable Energy Development Agency Ltd. (IREDA) has published a refinance scheme with support from the National Clean Energy Fund (NCEF). This scheme elaborates on the revival of operations of existing biomass power and small hydropower projects that have been affected by unforeseen circumstances.
Important Things To Consider Before Applying for Business Loans for New Businesses
What is the Required Loan Amount?
Plan out your company’s expenses, such as transportation, labour, and miscellaneous charges. It is advisable to always jot down and summarise the expenses in fixed and variable terms, you can bifurcate one time expenses and recurring expenses as per business requirement. Once this is completed, you will have a better estimate of the loan amount needed. While seeking a loan amount a little higher than what you require is a good thing, try not to quote too high a loan amount compared to the required amount. Extra capital can help your business in various ways, but keep in mind that the loan interest rate would also be higher.
What is the Applicable Interest Rate?
Understand the rate of interest that you have to pay on your loan. The interest rate on your loan will vary depending on various factors, including your income, amount, tenure, credit history, and the banking institution or lending company you choose. When considering obtaining a new business loan, ensure you receive the most reasonable deal possible. You must devote some time to research to choose a bank or lender that can provide you with an affordable interest rate. While tiny variations in interest rates may not appear to be significant, they will significantly impact your ability to repay the loan in the long-term.
Eligibility Criteria for Obtaining A New Business Loan
The eligibility criteria might modify slightly per the bank’s or NBFC’s policies. Following are some of the general ones:
- You should not be less than 21 years old (18 years in few schemes) and not more than 65 years old
- You must be an Indian citizen
- You must provide a business strategy for the start-up
- A decent CIBIL score (a score of 700 at least) is considered to be good, however, it varies in various schemes.
Documentation Required for Applying for A New Business Loan
There are certain essential documents that you need to get in place while opting for a loan for a new business. Although these might vary depending on your lender, the following are the common documents required for obtaining a startup loan:
- Complete loan application form from your desired lending institution
- A few copies of your passport-size photographs
- A thorough, self-drafted business strategy
- KYC documents, such as your Aadhar card, PAN card, passport, or utility bills. If the startup is a collaboration, the KYC documents of all participants are required
Complete utilisation of funds and revenue generating model of your business.Conclusion
Financing your business is a difficult task. When your business is in its nascent stage, you might need urgent funds to meet capital requirements for its establishment and sustenance. You might consider borrowing a business loan for this. A business loan will provide you with the necessary funds to easily meet your necessities. Consider a thorough analysis before opting for one, and choose the plan or scheme that best suits you.
Frequently Asked Questions (FAQs)
Can I take a business loan for vehicles used in my firm?
Yes, business loans offered can be used to purchase company automobiles.
Can I get a business loan if my firm has no revenue?
While getting such a loan approved is difficult, some lenders offer loans for organisations with no income against some collateral provided, generally at higher interest rates.
Is a business plan or idea mandatory to apply for a start-up loan? Why?
Yes. Most lenders want a business idea or a solid plan when you apply for a business loan. Make sure your business plan is clear and concise and outlines your organisation’s goals and objectives.
What is the maximum amount that one can avail through a startup loan?
The maximum loan amount is established by the lender, based on various factors, such as the company’s annual sales/ revenue and credit history.
What if I require a more significant loan amount than my pre-approved offer loan?
Customers can contact their lending bank if their needs exceed the loan amount offered. If you are eligible, an additional set of documents might be required for processing the case for a larger loan amount, which the concerned institution will guide you through.
Jatin is an Investment Professional in the making with expanding expertise in the debt and equity markets. He has completed his Bachelor of Technology in Civil Engineering from the Manipal Institute of Technology. He has helped build Wint Wealth in various capacities ranging from being a member of the Investor Relations Team to contributing actively at the Founder's Office. He has been an integral part of the Assets Team for about a year now.