One of the biggest barriers for an entrepreneur in India is to access requisite funding. Fortunately, a line of startup business loans can be availed, which could fire your entrepreneurial dream. In this blog, we look at some of the best startup financing options available in India, including government-backed loans, private lenders, eligibility criteria, and what factors to consider before taking a plunge.
What is a startup business loan?
A startup business loan is meant to provide the financial support needed to begin a new business. Be it buying equipment or hiring employees, these loans prove to be of utter importance for meeting initial operational expenses in the early growth stages of the business. Amongst different kinds of loans available in the country, finding the right fit becomes very crucial to ensure smooth operations and hence successful business growth.
Types of Startup Business Loans in India
Following are some of the best startup business loan options in India:
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Startup Business Loans with Government-Backed Schemes
In the search for startup business loans, the government of India probably is the best avenue to explore. Many government schemes provide monetary help for new entrepreneurs with the view to ensure growth in the industries.
The PMMY has been devised to meet the financial requirements of micro and small units. Under this, the system provides for loans up to ₹10 lakh. There are three categories under this: Shishu-up to ₹50,000; Kishor-₹50,001 to ₹5 lakh, and Tarun- ₹5 lakh to ₹ 10 lakh.
Stand-Up India Scheme: This Stand-Up India Scheme is planned to assist SC/ST and woman entrepreneurs by sanctioning loans within a range of ₹ 10 lac to ₹ 1 crore.
Startup India Scheme: Innovation with ease in regulations, funding opportunities based on government loans and subsidies. It is ideal for technology-based startups or even innovative businesses.
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Private Banks Startup Business Loans
A number of private banks in India also offer business loans to start-ups, which again charge highly competitive interest rates, coming with friendly payback options.
ICICI Bank Startup Loan: ICICI offers customized loans to small-scale businesses and startups, with flexible loan payback schedules and competitive interest rates. Such loans are perfect for entrepreneurs to cover the operational costs during the initial period.
HDFC Bank Business Growth Loans: Basically, HDFC loans are well-known for their fast sanctioning. These loans may grant an amount worth a considerable figure to startups. Fundamentally, HDFC is good for those who need quicker disbursement.
Axis Bank SME Loans: To meet day-to-day expenses, Axis Bank grants working capital loans to startups. The loan products are highly flexible in terms of repayment.
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NBFC and Fintech-Based Startup Lending
NBFCs and fintech platforms will come in handy in cases when entrepreneurs do not get bank loans due to poor credit history or collateral. In such cases, NBFCs and fintech platforms will be handy alternatives to raise funds for their businesses.
LendingKart: It offers collateral-free loans for startups with minimum paperwork. Besides that, it has quick disbursement and flexibility in the loan repayment schedule, apt for small-scale businesses.
Bajaj Finserv: The NBFC doesn’t ask for collateral to provide business loans for startups. Easy on eligibility criteria, it is ideal for those who aim to access funds as soon as possible.
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SBI SME Startup Loan
The State Bank of India has SME loans specifically for providing monetary support to small and medium-scale enterprises. It will help a new business with its working capital and term loan requirements. The startup loans provided by SBI have been observed to have competitive interest rates and long repayment tenures, hence gaining wide popularity among budding entrepreneurs.
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Baroda Startup Banking by Bank of Baroda
The Startup Banking Initiative by the Bank of Baroda offers a bouquet of financial products to startups, comprising term loans, working capital loans, and credit for equipment purchases. This loan scheme has been designed to respond appropriately to the different kinds of financial needs that emerge during the growth of a startup, with flexible repayment terms at competitive rates.
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IDFC FIRST Bank Startup Loan
IDFC FIRST Bank offers tailored loans for startups to minimize collateral requirements as much as possible. It also offers expansion loans, loans for equipment purchases, and all other requirements that come under the operation of the business. The speedy sanction and flexibility in terms have made them comfortable for small-scale industries.
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Kotak Mahindra Bank Business Loan
Business Loans by Kotak Mahindra Bank facilitate flexible payback and collateral-free options. This loan is targeted toward meeting the startup funding requirements of operation or expansion. They also provide quick processing and disbursement for the startups to get access to funds when in need.
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Tata Capital Startup Loan
This involves venture capital loans, loans on machinery, and working capital loans in a start-up. Tata Capital provides collateral-free loans at flexible terms and at a unit that constitutes the sectoral funding needs of SMEs, along with startups. It therefore covers most of their funding requirements in these areas.
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PNB Startup Loan
Punjab National Bank has various financial products for different categories of new businesses. Its startup loan is directed towards business expansion, purchase of machinery, and meeting working capital requirements. The loans are, therefore, quite suitable for a startup having limited collaterals due to its competitive interest rate and longer repayment tenure.
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SIDBI Startup Loan
The variants of loan schemes by SIDBI for startups and MSMEs are aimed at facilitating growth, providing working capital, and equipment purchases. Lending by SIDBI is made friendly with simplified eligibility criteria and less documentation.
Things to Keep in Mind When Looking to Apply for a Startup Business Loan
Things to Consider Before Applying for a Startup Business Loan:
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Know Your Needs
Approach the application with utmost careful consideration of how much money your business would require and for what specific purpose. This could be either equipment purchase, working capital, or the knowledge that will help you to choose the best loan product.
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Prepare a Credible Business Plan
Most lenders will want a comprehensive business plan, describing the growth potential and profitability of your startup. A clear-cut roadmap with projections about finances will not only help increase your likelihood of an approval but in negotiating favorable loan terms as well.
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Comparison Shopping For Loans
Never take the first loan offer that you get. Instead, compare options from the government, private banks, and even fintech lenders for the best interest rates, repayment terms, and conditions that fit your business needs.
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Beware of Hidden Charges
Always read the fine print, which could mean processing fees, prepayment penalties, or even annual maintenance charges, coming as complete shocks. All these hidden fees add to the overall cost of the loan. So, transparency must be ensured before finalizing the deal about the amount.
Eligibility Criteria for Loans on Startup Businesses
Though these may vary across different lenders, below are some general requirements for loans dealing with startups:
- Age of Business
While several startup loans are created for new businesses, many of them require your business to be at least six months to a year older. This helps the lender to gauge the stability and growth potential of your business before extending credit.
- Credit Score
A good credit rating can get you a better offer on your loan, comprising lower interest rates and higher amounts. The stronger your personal or business credit score, the less risk the lender will face, and this can easily bring in approval.
- Collateral
Collateral may be required by a few lenders, which becomes especially crucial in the case of a higher amount of loan facility. Still, most NBFCs and fintech platforms grant loans without asking for collateral, which makes them much more accessible for startups without too many substantial assets to pledge as security.
- Business Turnover
The lenders would normally consider the actual or projected turnover of your business while assessing your loan application. Showing steady revenues or growth potential will increase your chances of securing a loan, especially from banks and NBFCs.
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Startup Loans: Advantages
There are several advantages of startup business loans for entrepreneurs, including:
- Access to Capital
Startup loans avail the necessary cash required to cover your business’s initial expenses, including equipment, inventory, or even employee labor. This immediate access to capital will ensure that your startup gets into operation, gets on its feet, and faces no cash-flow problems during its initial stages.
- Flexible Terms
The repayment schedules of many lenders can be very flexible and tuned to the peculiarities of the revenues the startup will generate. In such a case, the company can very efficiently manage its cash flow by paying back the loan amount in tandem with the earning cycle. This would reduce the financial impact during periods of low income.
- Ownership is not diluted.
Unlike equity funding, a loan for a startup lets you maintain full ownership and control of your company. You won’t have to give up shares or lose decision-making powers, and you are at liberty to grow your business as you see fit, though not without access to funds.
- Improvement in Credit Score
Paying back the startup loan on time will contribute to an improvement in your business credit score. With a great credit history, it’s going to be quite easy to get larger loans or even better financing terms, thus assuring that your business grows easily without being tied down by huge financial burdens.
- Speedy Disbursement
Several fintech lenders and NBFCs can sanction loans within a few days. Perhaps startups want urgent capital to exploit new opportunities or meet immediate business needs in less than the stipulated time.
- Loans could be tailored to specific requirements.
These loans also have a wide range of shades: from working capital and purchase of equipment up to expansion. You can find any kind of financing from short-term to long-term would match your business goals and therefore make financial planning easier.
Things to Consider Before Availing of a Business Loan in India
Following are some factors you should consider before availing of a business loan for your startup:
- Interest Rate
The interest rate can multiply the actual cost of availing of credit. Loans offered by the government have relatively lower interest rates and, hence are cheaper to service. On the other hand, loans by NBFCs or private lenders could be costlier since the rates are higher, adding to your burden over some time.
- Loan Tenure
Choosing the right loan tenure is an important aspect of ensuring manageable repayments. While an extended tenure lowers the monthly payments, it increases the total interest paid. A shorter tenure, on the other hand, may mean higher monthly payments that could burden cash flow at a very critical time in the initial growth of the business.
- Loan Amount
Calculate your needs for lending precisely, to identify the quantum that will suit your startup. Too little could lead to operational deficiencies, while too much could result in over-indebtedness, which might negatively affect financial stability and creditworthiness.
- Processing Time
Determine how long the process of the loan application will take. This is mainly if you need the cash urgently. Some lenders have slow processing, hence you have to identify a lender that could provide speed in processing so you don’t miss out on any business opportunities.
- Repayment Terms
Understand the flexibility at repayment as extended by the lenders. Find the ones that allow you to adjust your repayment schedule or even make pre-payments without penalties; this way, you clear off some money burden during the early growth of your startup.
- Lender Reputation
Before applying for a loan, you can also research the reputation and reliability of the lender. Based on customer reviews and feedback, going with a lender who is known for good practices such as transparency, excellent customer service, and will facilitate ease for you in the borrowing process.
- Financial Projections
Have realistic financial projections ready, even before applying for loans. Besides helping you arrive at the right amount and repayment plan, this will assure lenders about the viability and scalability of your start-up, which may increase your chances of getting approved.
Conclusion
This would, however, depend on the nature of your business needs, financial standing, and scale of operations. Government-backed loans, such as the Mudra Loan or the Startup India Scheme, are ideal for smaller businesses that require less capital. Private lenders like HDFC Bank and ICICI Bank come in handy if your startup is scaling up. Besides, fintech platforms like Lendingkart are ideal for startups in dire need of quick collateral-free financing.
