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The Loan Guide For Startups: From Government Loans To Raising Debt

The Loan Guide For Startups: From Government Loans To Raising Debt

Loans or debt funds are provided against company bonds and need to be repaid along with interest

Loans include debt funding from investors, government loan schemes or bank loans

What do startups need to avail business loans from various sources?

As one comes up with a fresh and exciting business idea, translating it to a successful startup might seem like an easy task, but most mew businesses fall at this hurdle. And, to realise this dream, an entrepreneur needs vision as well as capital. Though difficult, it’s not impossible.

While the vision differs from startup to startup, funds can be arranged through either loans, debt funding or equity funding, or through friends and family and other less formal sources.

Equity funding, venture capital or VC funding come in to a business against company shares and don’t require repayment, loans or debt funds are provided against company bonds and need to be repaid along with interest. The major difference here is that equity fund investors look for returns from investment and company equities entitle them with the power of interfering in business decisions to secure returns; loans, on the other hand, require repayment and interest payment only and the entrepreneur retains autonomy over his own business.

Thus, for those who are not comfortable parting with company shares or losing autonomy, startup business loans come as a solution.

Types Of Startup Loans

Startups can avail loans from different sources, including debt funding from individual investors, government loan schemes or bank loans. Aiming to promote entrepreneurship and encourage the youth into it, the government of India has stepped in here to offer business loans under different schemes to startup owners at various stages.

Apart from that, there are startup business loans available from banks, non-banking financial institutions (NBFC) or investment companies too. With the startup ecosystem gaining a foothold in the Indian economy, the demand for these loans is also rising with every passing day.

Besides, business loans can be availed from individual investors in the form of debt funding, bridge funding or crowdfunding. Debt funding is provided against company bonds certifying repayment after a stipulated period along with interest. Bridge funding, on the other hand, is raised in between long-term funding rounds to cover short-term expenses, while crowdfunding is attracting loans by presenting the business plan on a common platform against certain benefits.

Government Loans

To get startup funding, thus an entrepreneur can rely on government business loans or debt funding from investor companies. This is pretty helpful because startups with their nominal or no business experience come across as the riskiest deals for investors. Thus, in most cases, investors providing equity or debt financing are sceptical and refuse to fund them.

Government loans for startups can be broadly divided into startup business loans and small business loans. These loan schemes are categorized into various types depending on the areas of fund requirement and the nature of expenses to be incurred. So, before availing government business loans under these schemes, the entrepreneur must identify his own needs and fund requirements and choose schemes accordingly. For that, while he needs to know how to get a business loan, on one hand, he also needs to research well the kinds, categories and criteria of the startup business loan schemes available and match his own eligibility with them.

Let us start with the types of startup business loan schemes offered by the government of India. These loans, designed by different departments of the government of India under various programmes, projects and initiatives aim to actively support system during the startup entrepreneurs struggle period. Listed below are the schemes that have earned popularity within the startup ecosystem in India.

  1. Credit Guarantee Scheme (CGS)
    Offering collateral-free business loans to new and existing micro and small businesses’ working capital requirement of up to INR 10 Lakh and with land or building mortgage or only primary security for requirement up to INR 1 Cr, this is considered one of the popular startup loan schemes.
  2. Mudra Loan
    Under this programme, the Narendra Modi government offers loans up to Rs. 10 lakhs to startups and small business owners under 3 categories: Shishu, Kishore and Tarun. Also called PM Modi Loans, these government business loans, along with a microcredit scheme up to INR 1 Lakh, are disbursed through banks, NBFCs or MFI’s and they get refinanced from Mudra, an NBFC designated for the government initiative.
  3. National Small Industries Corporation Subsidy
    The National Small Industries Corporation (NSIC) offers this subsidy to startups and small enterprises, aiming to provide financial and marketing assistance to them. Ideally, suited for buying raw materials, this subsidy can be availed by the entrepreneurs seeking startup loans, at the nascent stage of the business or the growing phase of expanding the market.
  4. Credit Link Capital Subsidy Scheme
    Meant to be availed for technology upgrading, this startup loan scheme provides 15% subsidy to eligible businesses, up to a cap of INR 15 Lakh. The technology upgrading process is a matter of huge expense, so this business loan cuts down a lot on worry levels.
  5. Stand Up India Scheme
    This facilitates banks in providing startup business loans for women entrepreneurs and those in SC, ST categories especially. This loan scheme for women, within the bracket of INR 10 Lakh to INR 1 Cr, offers a 7-year tenure.
  6. Bank Credit Facilitation Scheme
    Under this scheme, NSIC partners banks to provide no-cost loans to MSMEs for 5-11 years.
  7. Coir Udyami Yojana
    Aided by the Coir Board of India, this initiative provides startup and small business loans up to 25% of the total project cost.

Raising Money From Investors

If an entrepreneur doesn’t want to go for a lot of paperwork and complicated procedures, he can opt for loans from individual investors. This can be in the form of debt funding, bridge funding or crowdfunding.

Venture debt funding is the case where an entrepreneur approaches the investor with his business plan and documents and convinces him for funding. Here, the entrepreneur sells company bonds to get debt funding and repays the money along with interest after a prescheduled period. Also, debt funding can be raised both for long- and short-term loans.

Further, crowdfunding takes place on a common platform where the entrepreneur presents his business plan and offers certain benefits to seek loans from investors. Startups opt for crowdfunding as it is less complicated and small investors also prefer this route to earn interests and other benefits.

Bridge funding is usually meant for interim phases in between long-term fundraising rounds by a startup. Here, the process is relatively less complicated as the loan is meant for temporary basis and short period and usually occurs when the entrepreneur needs fast cash for certain expenses.

What Startups Need For Availing Business Loans?

Once the entrepreneur has completed his research of the government business loans and the respective interest rates, the next step is to learn how to get business loans, matching the eligibility criteria and fulfilling the requirements. To apply for the government loan for a business startup in India, the entrepreneur needs to submit documents of proof.

  1. Personal background
  2. Business background
  3. Business plan
  4. Personal and business tax returns for the last three years
  5. Financial documents
  6. Legal documents
  7. Loan collateral (if needed)

The respective authorities will check eligibility of the applicant based on these and sanction loans thereafter.

To operate a startup in India, an entrepreneur needs to register his business under Startup India, the flagship initiative of the government of India to nurture and strengthen the startup ecosystem. This requires the entrepreneur to submit his business details on the said portal and access information, guidelines on entrepreneurship from time to time and avail of startup India loans with ease. With all the details of startup India loan schemes available on the portal, all one needs is to pick up the right choice according to his business needs. For this, the entrepreneur needs to meet the startup India loan eligibility criteria, which needs the following conditions to be fulfilled:

  1. It should be a new company or within 5 years, with a turnover of less than INR 25 CR.
  2. It has to be a private limited or a limited liability partnership.
  3. Needs to have DPIIT approval and thus funded by Incubation, Angel or Equity fund.
  4. Having a patron guarantee from the Indian patent and trademark office.
  5. Having a letter of incubation.
  6. Innovative scheme and products are mandatory.
  7. All the related funds have to be registered with SEBI.

In the case of loans or debt funds raised from individual investors, a lot depends on the business pitch or the plan presented. To convince investors, the plan or the pitch has to be well structured with clarity of objectives, business growth path and goals, and definite strategies to achieve them.

Additionally, company balance sheets, supportive data and documents and proofs of background check also need to be submitted, as per the requirements stated by the investor. In the case of venture debt funding, the entrepreneur sells company bonds to get the fund, which acts as a certificate of borrowing.

With all the know-how on how to get a startup loan for new business at hand, the entrepreneur is now ready for the plunge. All he needs is to stay calm, complete all the steps correctly and apply for his loans. The startup loan for new business will thereby act as a pillar, aiding the company in all its expenses and help it grow to success.

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Team Inc42

Inc42 Staff

Inc42 Media is a digital media startup known for its end-to-end coverage of the Indian Startup Ecosystem. Inc42 has published 15,000+ stories so far and touch the lives of over 10 million people every month. Join us and be the part of the startup revolution.

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