Every startup mag and blog discusses funding startup with investors. I don’t find too much about funding with the help of loans. Yes, it has its own drawbacks. It increases the personal risk on founders. There will be a lot to lose if your startup fails. After all, if you don’t believe in your startup, how could an investor or customer? Make sure you do the home work and test your product market before you take the leap.
We managed to acquire a couple of loans from different government institutions. There are provisions for loans up to INR 8–20 Cr ( up to $2.99 Mn). It might not be a huge sum to build an empire, but should be sufficient to kick things off. Here are the steps that we followed.
Find An Incubator
We prepared a list of incubators that meets the below criteria:
- Government backed, preferably DST*.
- Has seed money programme.
- Incubator is reputed enough, so that you do not need to market it.
We ended up in the TBI (Technology Business Incubator) at NIT Calicut. It did meet the criteria to an extent and had enough room to accommodate us. You might not believe this, TBI-NITC is one of the oldest (started in 2004) incubators. Other TBIs also met the criteria, but we chose TBI-NITC.
The incubators may or may not help you build your product/business. The benefit from incubator’s resource depends on the type of product, nature of your business, etc. We expanded to Cochin in less than six months, but our registered office is still at TBI.
*TBIs under DST has better advantages over others, better access to grants and higher funding plans from TDB and DST.
Seed Money From TBI
The TBI-NITC has a seed money programme. You can avail this to start off your project. After six months (first evaluation) you will be eligible for the Seed Loan. Your startup will be evaluated by a panel of dignitaries comprising NIT professors and senior officials from private/ublic limited companies, headed by the Director of TBI. This will increase your credibility in the next round of funding.
The seed money programme at NIT-TBI ranges up to INR 25 lakhs ($37.22K). Almost every TBI or incubator in our list had similar or better seed schemes. Compared to 2013, now there are more choices, so, do your research.
KSEDM Scheme – KFC (Kerala Financial Corporation)
Now, this opportunity knocked on our door. KFC officers gave an intro about their scheme on their visit to TBI. They had a collateral & interest-free scheme, with 12 months moratorium (KSEDM Scheme in KFC). We received the first installment by the end of the eighth month. The loan amount varies with the eligibility of the founders, nature of business, etc. You can avail up to 20 lakh ($29.78K) on this scheme.
Every state has their own State Financial Corporation. Enquire about the loans under the CGTMSE Scheme.
KSEDM Extension – KFC
You can avail a loan from any financial institutions with 150-200% collateral. If deal in IT/Software product, collateral will be a tough nut to crack. We met with KFC officials, explained our requirements and issues (the collateral). They were getting similar requests from other projects too. They formulated a new scheme for those who needed an expansion on KSEDM Scheme. The new scheme is not collateral free, but got reduced to 25% of the total loan amount. In addition, one gets a moratorium of 12 months and reduced interest rate.
Regular Loan Scheme – KFC
Under the general loan scheme, KFC can lend you up to INR 8 Cr ($1.2 Mn) for LLPs and INR 20 Cr ($2.99 Mn) for private limited companies. You can avail the scheme with sufficient collateral and proven track records.
The list does not stop here. There are more plans available under different government schemes like DST, TDB, PMYGP, etc.
A Few Time-Saving Hacks
- Information Gathering: Before you meet the officials, grab details about schemes, its terms, procedures etc. Be ready with the proposal before you meet them.
- Meet the Chief: Figure out who is the decision maker, fix an appointment and meet him. He will have better visibility, enough time (yes, you heard it right, as we have first-hand experience to vouch for that), and the authority to initiate changes. This is an old trick, and it worked well in our case.
- Follow up: Follow up with the officials on regularly. We used weekly follow-up. Use the second method talk to the chief for a better result.
Alternatives To Government Institutions
It is possible to get funding from non-government agencies including private/nationalised banks and other non government financial institutions. Use the second method, as it is just a matter of convincing. Convince the top most official, he will fight for you. We used the same method with banks too. It worked well. We were leaning more towards govt. institutions, so went along with KFC.
Pros and Cons
I guess you are well aware of the pros – you get more time before taking on investors, get better valuation, etc. Let me talk more on the cons.
- Losing Focus: It may lead to you getting distracted and losing focus from the product or the real goal. These funding activities could be handled by any one of the founder, in 2-3 hours per day. Do not allow other founders or team members to part with their activities.
- Time Consuming & Frustrating: Things will not happen over a night. It will take time, so be patient and always be ready with plan B. You are going to deal with executives/officials who may not be up to pace with technical jargons or understand the idiosyncrasies of a startup. Get a feel of their pace and act accordingly. Every office has its own politics; stay away from it.
- Personal Risk: The debt or loans puts a lot of risk on founders’ shoulders. It will be a precious mess if you fail. Your credit score, your personal life, everything is at stake. you can’t think about a loan or credit in the near future. And still you may need to figure out a way to pay the EMIs.
- Exposing Business Idea: In this race, you may end up submitting your proposal to almost every financial institutions. You might not be able to sign an NDA, so be careful on what you expose.
Personal Advise to Founders
Always maintain cash balance for next 6–8 months, might help you reduce the stress a bit.