Business Loan Details
Startup business loans are dedicated to the business owners of startup firms. The funds obtained from the business loan solve requirements for business expenses like purchasing machinery, inventory, overhead costs, etc.
However, borrowing money from a particular lender or bank is only possible if the eligibility criteria are met. Having a detailed business plan where the goals and objectives are stated is also essential.
Types of Startup Business Loans Offered in India
1. Line of Credit
A financial or banking partner may provide a business owner with a facility called a line of credit that enables them to withdraw money as needed up to a certain limit. The funds are therefore provided on a need-to-use basis rather than as a lump sum term loan.
One of the many benefits of using this method of startup financing is that the owners pay interest on the amount they are presently borrowing. To cover unforeseen expenses, the line of credit is typically utilized. It is also used as short-term working capital to boost the cash flow.
2. Equipment Financing
It can be used to buy automobiles, machinery, or other items required for a business. Banks, dealerships, and online equipment loan companies all offer equipment financing. Usually, a business loan is provided in exchange for keeping the bought machinery, equipment, or cars as security; a processing fee is also imposed.
The key advantage of equipment financing is acquiring ownership of a priceless item while making payments over time (generally one to five years). Startup companies that rely on machinery or equipment can consider equipment funding.
Business Loans for Startups by the Indian Government
As of 29th August 2022, India has over 77,000 DPIIT-registered startup firms. However, when a firm is merely an idea or in its early stages, it can be challenging to secure finance, even with good credit history.
Additionally, India’s Micro, Small, and Medium Enterprises (MSME) sectors have limited access to formal finance. For this reason, the Indian government opted to implement new business financing programs for MSMEs and startups.
The Small Industries Development Bank of India (SIDBI) has started financing directly to MSMEs and startups instead of banks. Some of the most popular business loan schemes are:
1. Bank Credit Facilitation Scheme
This business loan scheme, overseen by the National Small Industries Corporation (NSIC), aims to fulfil the credit requirements of MSME units.
To provide loans to the MSME units, the NSIC has collaborated with several institutions. The payback period of the program varies from five to seven years, although in exceptional circumstances, it may be increased to 11 years.
2. Pradhan Mantri Mudra Yojana (PMMY)
PMMY was introduced in 2015. It is run by the Micro Units Development and Refinance Agency. It intends to provide loans for various trading, manufacturing, and service sectors.
The program gives loans in the three categories of Shishu, Kishor, and Tarun for sums starting from 50,000. It can go to a maximum loan amount of Rs. 10 lakhs. Craftspeople, business owners, vegetable sellers, machine operators, repair companies, etc., can apply for a Mudra loan.
3. Credit Guarantee Scheme (CGS)
Both new and current MSMEs engaged in service or manufacturing operations may apply for this loan. However, SHGs, farms, retail businesses, and other entities are not eligible.
Under this program, run by the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), a maximum loan amount of up to Rs. 2 crores is permitted.
4. Standup India
This program, which was started in April 2016 and is run by SIDBI, provides loans to startup businesses engaged in manufacturing, trade, or services. Loans between Rs. 10 lakh and Rs. 1 crore are usually obtained through this program.
The maximum permitted moratorium term is 18 months, and the repayment of loans obtained under this program can be completed in seven years.
5. Sustainable Finance Scheme
This program, which is the SIDBI runs, intends to provide loans to businesses that deal with non-renewable, green, and renewable energy sources as well as technical gear.
The government launched this program to provide initiatives that are part of the full value chain for cleaner manufacturing, sustainable development, and energy efficiency.
If one wants to start a new business, he may use this online service to apply for business financing.
He may be eligible for a loan of almost Rs. 10 lakhs, applicable under the Mudra loan scheme, along with Rs. 5 crores under the MSME loan scheme, depending on his eligibility and other restrictions.
Additionally, he is eligible to apply for home loans up to Rs. 10 crores, personal loans up to Rs. 20 lakh, and automobile loans up to Rs. 1 crore.
Comparison of Business Loan Interest Rates offered by Top Banks/NBFCs
|10.00% – 22.50% p.a.
|1% – 1.5% per month (Flat ROI)
|1% per month onwards
|IDFC First Bank
|17% p.a. onwards
|17.50% – 25% p.a.
|Up to 26% p.a.
|Kotak Mahindra Bank
|16% – 19.99%
|17% – 21%
|1.5% per month onwards
|19% – 24% p.a.
|Tata Capital Finance
|19% p.a. onwards
|1.5% – 2% per month
Benefits of Startup Business Loans from Banks/NBFCs
There are several benefits of availing of startup business loans. These are:
- For a new company loan, no collateral or security is required.
- Startup business loans have simple and adaptable payback terms.
- The amount of paperwork needed to apply for a startup business loan is modest.
- The money is transferred quickly to the bank account of the applicant.
- The lender will base its interest rate solely on the credit score history of the applicant.
Factors to Consider While Applying for the Startup Business Loan
The factors to be considered while applying for startup business loans are:
1. Determine the Loan Amount You Need
While it is a good idea to ask for a startup business loan amount more than required, it is wise to stay within the allotted amount. Extra funding can benefit a startup company in many ways, but the owner should know that the loan interest rate will be higher.
2. Look for the Best Financial Corporations
An application for startup business loans can be made via banks and non-banking financial organizations in India.
The interest rates, tenures, and other terms of every organization are unique. Hence, it is necessary to ensure that the financial situation is appropriate while applying for a business loan.
3. Check Your Credit Score
Credit score is one of the most crucial things to consider when applying for a business loan. If a loan has been taken out previously or there is credit card debt, the repayment has to be made on time, if there were any defaults, etc.
The likelihood of a loan being approved improves significantly with a strong credit score.
Things to Keep in Mind When Applying for a Startup Business Loan
In order to avail of startup business loans, there are a few aspects to keep in mind:
- Create a clear, thorough business plan.
- Give a precise estimate of the available finances.
- Include a summary of aims and objectives of the company and a graph outlining the potential profits and expansion of the firm.
- In the business plan, specify how the loan money will be utilised.
Eligibility Criteria for New Business (Startup) Loan in India
The eligibility criteria for startup business loans depend on the lender. However, the general guidelines that should be abided by are:
- It is mandatory to be an Indian resident citizen.
- It is essential to have a good credit score of 700 or more.
- The business plan should be operational for two years minimum.
- It is necessary to fall in the age group of 21 to 65 years.
- The minimal business income should be around Rs. 2 lakhs.
- A business ITR should be filed for one year at least.
- The new business should be set up as a limited liability partnership, a private or public limited company, or a sole proprietorship.
Documents Required to Avail Startup Business Loan
The documents required to avail of the startup business loans are:
- A filled-up application form
- Passport-sized photographs
- Self-composed new business plan
- Bank statement for the past 12 months
- PAN Card and Business Address Proof
- The ITR of the past year
- KYC documents like Utility Bills, AADHAR Card, etc. If it is a partnership, all the partners must produce documents.
How to Apply for Startup Business Loan?
To apply for startup business loans, the following steps must be considered.
Step 1: Fill up the necessary fields like annual gross sales, employment status, loan amount, collateral type, mobile number, city of residence, etc.
Step 2: Choosing the loan amount required and the tenure for repayment.
Step 3: Provide the documents required mentioned above.
Step 4: Apply for startup business loans through public or private financial organizations.
Fees and Charges:
It is essential to pay some charges while applying for startup business loans, and state the business plans as well.
|One-Time Processing Fee
|15% - 27%
|Maximum 2 years
|Rs 50,000 to Rs 2 crores
|Every two weeks or Monthly
Startup business loans are crucial, especially during the initial phase of the business. But it is necessary to assess what type of loan is required based on the nature of the business.
Before getting the loan, it is essential to have a solid business plan, relevant documents, and a good credit score. There are a lot of business startup loans provided by the Indian government, which involve PMMY, CGS, Standup India, Sustainable Finance Scheme, etc.
The loan that is best for startup businesses depends on the type of business. A person might go for a line of credit or equipment financing.
Several loan schemes are offered by the Indian government (all with different loan amounts and associated conditions). It is easy to choose from Bank Credit Facilitation Scheme, PMMY, CGS, Psbloansin59minutes.com, Standup India, etc.
A person can only apply for startup business loans if the eligibility criteria are fulfilled. Then the person has to fill up the application form and specify all the details like annual gross sales, employment status, loan amount, collateral type, etc. Then they must specify the loan amount, repayment tenure, and provides the necessary documents.
A startup business loan is one of the most efficient ways to get the business off the ground and cover initial expenses. However, it is only good to take a business loan if the entrepreneur has a viable business plan and all the parameters of the eligibility criteria are met.
The entrepreneurs also need to assess the repayment capabilities before they avail of the loan.
The maximum startup business loan that one can avail of depends on the lender. It is also dependent on several factors, such as credit history, eligibility, repayment capabilities, annual turnover of the company, etc. However, the maximum collateral-free loan that one can avail of is one crore.
Yes, a business plan is crucial to avail of a startup business loan from a lender. The owner and the partners must ensure that the business plan is properly explained and the goals and objectives are clearly stated. They also have to share the strategy of using the loan judiciously.
Certain business loan schemes offer loans without asking for any forms of security. Providing any asset as security is unnecessary while applying for loans under CGTMSE, Startup India, Standup India, or Mudra Yojana schemes is redundant.
A business with a low credit score might get a startup Indian loan, depending on the rest of the parameters of the eligibility criteria. However, a higher score is preferable since it improves the possibility that the loan application will be accepted.