A billion-dollar business empire cannot be a reality with just a brilliant idea and a solid core team. Often, these ideas fail to come to fruition if not supplemented with enough capital. While it might look like venture capitalists and angel investors are the only options startups have to raise funding, one of the most sought-after sources of funding in India is startup business loans. This blog post tells you everything you need to know about startup business loan to choose the right funding source for your startup, small business, or MSME (Micro, Small & Medium Enterprises).
What Is A Startup Business Loan?
Startup loans are loans provided by financial institutions to businesses (not to be confused with personal loans) for a promise to repay the capital in the future, along with the interest the institution decides. Businesses may use this loan as working capital, for meeting short-term cash-flow requirements, purchasing the plant, and machinery, etc. Leveraging startup business loans have various benefits for the founders.
Some of the benefits of leveraging startup business loans are:
- You have enough capital to grow your business operations
- You do not have to relinquish your equity or a part of your ownership
- You can build a good business credit score for future loans
- You can protect your personal wealth from unprecedented loss
- You are not answerable to the bank about the profit and loss of your businesses
Although there are benefits to receiving a startup business loan, there are also some disadvantages. Some cons of leveraging startup business loans are:
- Qualifying for the loan is a task! Different lenders have different criteria, and new companies can find it hard to qualify them
- The repayment happens every month and can restrict your cash flow
- Non-payment of EMIs can affect your credit score irreparably
Here’s what the general features of a startup business loan look like:
|Rate of Interest||Upto 21% annually|
|Amount of Loan||Upto INR 75,00,000|
|Tenure of Loan||Upto 5 years|
|Processing Charges||Upto 6.5% of the amount of loan including GST|
How To Apply For Startup Business Loan In India?
Applying for a startup loan is quite straightforward in India. There are two ways you can go about this:
- You can apply for the loan online by visiting the lender’s official site. Most vendors provide an online form that needs to be filled out and submitted along with other documents (keep reading to know what documents you will need while applying for a startup business loan in India)
- You can directly visit the lender’s nearest branch office and get an application form, which you can duly fill and submit along with the supplementary documents
Bonus: Stay tuned to our blog to learn more about startup business loans in India, including the schemes by the Government of India under the Startup India initiative.
8 Key Types Of Startup Business Loans In India
There are many types of business loan options available for startups in India. Here, we cover the eight most widely leveraged startup business loans:
- Working Capital Loan: Also called collateral-free loans, working capital loans are loans leveraged by businesses to meet their daily working capital requirements. Working capital loans are usually short-term loans with a repayment tenure of up to 12 months. Working capital loans come at a higher interest rate due to their short tenure.
- Term Loan (Short & Long-term Loan): One of the most commonly availed loans, term loans are the ones that need to be repaid over a specific period of time. These can be broadly categorized into short-term loans (up to 12 months) and long-term loans (up to 5-10 years). The tenure for the same is set by the lender depending on the capital requested.
- Letter of Credit: Used predominantly by businesses involved in trading, a Letter of Credit is a type of credit limit in which the lender provides funding guarantees to suppliers of the businesses. Since international trade, both export and import, tends to deal with many unknown factors, LoC is critical in ensuring successful trade.
- Overdraft Facility: The overdraft facility is a type of loan offered by banks where the business owner is allowed to withdraw cash from their account even if the account balance is zero. The interest is charged daily on the amount utilized from the sanctioned limit. This type of business loan is usually provided against some collateral, typically FD with the bank.
- Equipment Finance or Machinery Loan: As the name suggests, an equipment or machinery loan is provided by lenders to purchase equipment for the business. While the terms and conditions for this differ from lender to lender, businesses availing of this loan get tax exemptions from the government of India.
- Loans under Govt. schemes: There are multiple loans facilitated by the Indian government specifically for startups. Some prominent government loan schemes in India include Mudra Scheme under PMMY, CGTMSE, Standup India, PMEGP, Startup India, PSB Loans in 59 minutes, etc.
- Invoice Financing: Invoice financing is a way for businesses to borrow money against the amounts due from its customers. It helps businesses improve cash flow, pay employees and suppliers, and reinvest in operations and growth. Businesses pay a percentage of the invoice amount to the lender as a fee for borrowing the money. Invoice financing can be structured in such a way that the customer is unaware that their invoice has been financed, or it can be explicitly managed by the lender.
- Merchant Cash Advance: Merchant cash advance companies provide funds to businesses in exchange for a percentage of the businesses’ daily credit card income, directly from the processor that clears and settles the credit card payment. The quantum of the loan is dependent on the volume of your monthly card sales value. Some lenders determine your eligible amount up to 200% of the value. Higher your sales; higher is the eligibility amount of advance.
The list doesn’t end there. In our upcoming blog posts, we will discuss the different types of startup business loans in India. Stay tuned.
Now that we know the different types of startup business loans available in India, let us look at the eligibility criteria to apply for these loans.
Eligibility Criteria For Startup Business Loan
As discussed, the eligibility criteria for new businesses for startup loans differ from lender to lender. As such, the following criteria stand true for a majority of the lenders in India:
- It would be best if you were a resident citizen of India
- It would help if you had a CIBIL score of at least 700
- Your business should have been operational for at least two years
- The minimum annual income of your business should be INR 2 lakhs
- Should be between 21 years to 65 years of age
- It would be best if you had a solid business plan with a realistic roadmap
- If the CIBIL score is on the borderline, then the bank may take a call to limit the loan amount
- Factors like turnover, partner/director salary, depreciation, the interest cost, and net profit after tax are critical parameters that decide the loan amount
- The ability to service the EMI for the current loan requested is depicted by the Debt Service Coverage Ratio (DSCR). Banks generally ask for a DSCR of 1.0 to 1.5.
Documentation Required For Getting A Startup Business Loan
Now that you know what the eligibility criteria for getting a startup business loan is, let us look at some of the key documents you will require to get the loan approved:
- Identity Proof with proof of age – Passport, PAN card, Aadhaar card, driver’s license, or voters ID
- Duly filled loan application form
- Photos – 2 copies passport size
- Address Proof – Electricity bills, Passport, Aadhaar card, or voters ID
- Proof of ownership – To show you own the business
- Income Statement – Proof of stable income of the applicant
- Bank Statements – The last 6 months’ bank statements
- Financial statements audited by a CA for the past 2 years
- IT returns for the last 2 consecutive years
Interest Rate Offered By Various Banks and NBFCs In India – 2022 For Startup Business Loan
Here are the interest rates for startup business loans from some prominent banks and NBFCs in India.
|HDFC Bank||10.00% – 22.50% p.a.|
|FlexiLoans||1% per month onwards|
|ZipLoan||1% – 1.5% per month (Flat ROI)|
|Axis Bank||14.25% – 18.50% p.a.|
|IDFC First Bank||14.50% onwards|
|Kotak Mahindra Bank||16% – 19.99%|
|Fullerton Finance||17% – 21%|
|Bajaj Finserv||17% p.a. onwards|
|RBL Bank||17.50% – 25% p.a.|
|ICICI Bank||18% onwards|
|Indifi Finance||1.5% per month onwards|
|Lendingkart Finance||1.5% – 2% per month|
|Tata Capital Finance||19% p.a. onwards|
|NeoGrowth Finance||19% – 24% p.a.|
|Hero FinCorp||Up to 26% p.a.|
Startup Business Loan FAQs
Is pre-closure allowed in business loans?
Some banks have a lock-in period of 6 months to a year, while others allow you to pre-close immediately after the 1st EMI is debited. In addition, banks may allow pre-closure at no cost or levy a pre-closure fee (2-5% of the amount being pre-closed).
Can I use a business loan for personal use?
Startup business loans are not allowed for personal use. The funds can only be used for your business. These loans cannot be used to pay down your personal debt, such as your mortgage or personal credit card bills.
Can I get a business loan with no credit history?
Yes! It is possible to get a loan with no credit history, but there are some possible challenges you should be aware of. Lenders may require you to put up personal property (such as a car or a home) as collateral to secure the loan. Additionally, loans for people with no credit history may come with higher interest rates and fees.
A Few Tips To Help Choose Between Different Startup Business Loans
- Compare the different interest rates available. While some lenders might offer cheaper interest rates, there may be hidden costs you should be wary of
- Ensure you go through all the terms and conditions of repayment before rounding in on the lender
- Be sure to research the lender’s history with startups. Ask around in your network about the lender’s flexibility
- Leverage the internet to understand the lender better. Check out their post-lending customer support plan for a seamless experience
Alternative To Startup Business Loan – Is There Any Other Way To Raise Capital?
India has a plethora of options to fund your startup business. At Velocity, we recommend going for revenue-based financing if you want a flexible, highly scalable, 100% digital fundraising process. This founder-friendly approach lets founders raise funds without diluting equity or providing collateral, and the repayments happen as a percentage of monthly revenue. You can learn more about revenue-based financing in our ultimate guide to revenue-based financing.