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  • Business Start up Loan

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  • A business start-up loan can be taken by individuals who want to start a new business, or existing businesses looking to expand current operations. Startups looking to get such a loan should ensure the following: 

    • Make a crisp and detailed business plan 
    • State in the business plan where the loan amount will be utilised 
    • Summarise the objectives and goals of the business along with a chart that will highlight the potential returns and growth of the venture 
    • Give a clear approximation of the funds 

    Business start-up loans are of two types - Line of Credit and Equipment Financing. 

    Line of Credit

    A startup business loan in the form of a line of credit works in a similar manner to a credit card. However, the card is tied to the individual’s business instead of their personal credit. One of the best benefits of a small business line of credit is that customers will have no obligation to pay interest on the borrowed sum for the first nine to 15 months, thereby making it easier to cover expenses whilst getting their business to a good start. The interest after the period will rise to anywhere between 7.9% and 19.9%, but the customer will only have to pay interest on the sum they use (similar to a credit card).

    Equipment Financing

    In this type of loan for start-ups, the equipment that is bought when starting the business is pledged as collateral, thus enabling the lender to charge a relatively low rate of interest with a slightly higher risk. The customer is expected to repay the amount used to purchase the equipment as revenues are generated from their business. Similar to a line of credit, applicants are expected to have a high credit score (680+), and the documents required to avail equipment financing include a vendor quote, a detailed credit report, and a statement showing the manner in which the customer intends to utilise the equipment. The main benefit of equipment financing is that the depreciation of the equipment can be used by the customer as a tax benefit for many years.

    Startup Business Loans by the Government of India

    There are more than 39,000 startups in India at present who have access to many private equity and debt funding options. However, it is a challenge to get funding when the business is just an idea or is in the early stage. Also, the Micro, Small, and Medium Enterprises (MSME) sector in India only has limited access to formal credit which is why the Government of India decided to roll out startup business loan schemes for MSMEs and startups.

    The Small Industries Development Bank of India (SIDBI) has also begun lending to startups and MSMEs directly rather than channelising it through banks. The interest rates on these loans are lower than the one offered by banks by almost 300 basis points. Some of the most notable and popular schemes offered by the Indian government for startups and MSMEs are as follows:

    • Bank Credit Facilitation Scheme Headed by the National Small Industries Corporation (NSIC), this scheme is targeted at meeting the credit needs of the MSME units. The NSIC has partnered with various banks to provide loans to the MSME units. The repayment tenure of the scheme ranges between 5 years and 7 years but in special cases, it can be extended up to 11 years.
    • Pradhan Mantri Mudra Yojana (PMMY) - Launched in 2015, this scheme is headed by the Micro Units Development and Refinance Agency (MUDRA) and it aims at offering loans to all kinds of manufacturing, trading, and service sector activities. The scheme offers loan under three categories – Shishu, Kishor, and Tarun in amounts ranging between Rs.50,000 and Rs.10 lakh. The Mudra loan can be availed by artisans, shopkeepers, vegetable vendors, machine operators, repair shops, etc.
    • Credit Guarantee Scheme (CGS) - This loan can be availed by both new and existing MSMEs that are involved in service or manufacturing activities but excludes educational institutions, agriculture, retail trade, Self Help Groups (SHGs), etc. Up to Rs.200 lakh can be borrowed under this scheme headed by the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).
    • Standup India - Launched in April 2016 and headed by SIDBI, this scheme extends loans to enterprises in manufacturing, trading, or services. Under this scheme, loans ranging between Rs.10 lakh and Rs.1 crore can be availed. The repayment of loans taken under this scheme can be done in seven years while the maximum moratorium period allowed is 18 months.
    • Sustainable Finance Scheme - This scheme is also headed by the SIDBI and aims at offering loans to industries that deal in green energy, renewable energy, technology hardware, and non-renewable energy. The government started this scheme with an intent to offer support to the entire value chain of cleaner production/energy efficiency and sustainable development projects.

    Eligibility Criteria for Startup Business Loan

    The eligibility criteria to avail startup business loans may vary from lender to lender but the generic ones have been listed below:

    • Age of the applicant should not be less than 21 years while the maximum age should not exceed 65 years.
    • The applicant must be a citizen of India.
    • Applicants should have a business plan.

    Documents Required to Avail Startup Business Loan

    Photographs 2 copies (passport-size)
    Proof of Identity PAN Card, Passport, Aadhaar Card, Voter’s ID, Driving License
    Address Proof Passport, Driving License, Aadhaar Card, Postpaid Phone Bill, Voter’s ID
    Age Proof Passport, PAN Card
    Bank Statements Last six months
    Proof of Income Income Tax Returns, Salary Slips,
    Signature Proof Bank verified signature, PAN Card, Passport
    IFSC Code Proof Cancelled/scanned cheque, copy of passbook’s front page of the same bank account

    How to Apply for Startup Business Loan?

    Applying for startup business loans is simple, quick, and hassle-free. Many financial institutions and banks have enabled online application for applicants to take advantage of. All they need to do is visit the official website of the lenders, fill up the form provided, and upload a few documents. Then there is an option of visiting the nearest branch of the lender and submitting the application form and documents in the physical form. Once the details and the verification are complete, the applicants will receive the loan amount directly into their bank accounts.

    Features and Benefits of Startup Business Loan

    • No collateral or security needs to be provided to avail a startup business loan.
    • Startup business loans come with easy and flexible repayment tenures.
    • The documentation required for availing a startup business loan is minimal.
    • The funds are swiftly disbursed to the applicant’s bank account.

    Frequently Asked Questions on Startup Business Loan

    1. What are the types of startup business loans that are available to me?

    Answer: There are two types of business loans that lenders offer for you to choose from – term loans and working capital loans. Term loans can be used for expansion of business, purchasing machinery, and launching new projects. These loans can be taken for a period ranging between 1 year and 10 years. Working capital loans, on the other hand, are short term loans that have to be repaid within a year and can be used to pay rent, pay employees’ salaries, stock up inventories, etc.

    2. How old does my startup need to be if I wish to apply for a startup business loan?

    Answer: To avail a startup business loan, your startup should be a new firm or under 5 years old. Also, the firm’s yearly turnover should not be more than Rs.25 crore.

    3. What is the maximum amount I can avail as a startup business loan?

    Answer: The maximum amount of loan that can be availed will depend on the lender and other factors such as the annual turnover of the company, your credit history, etc. For example, under the Mudra Loan, up to Rs.10 lakh can be availed under a startup business loan.

    4. Is a business plan mandatory for availing a startup business loan?

    Answer: Yes. Most lenders will ask you for a business plan when you apply for a startup business loan. Ensure that the business plan is clear and detailed with the business objectives and goals outlined. The business plan should also clearly state how the loan is going to be used.

    5. Which banks offer business loan for startups in India?

    Answer: Many lenders in India offer startup business loans and some of these are – HDFC Bank, Bank of Baroda, Citi Bank, ICICI Bank, and State Bank of India.

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