- May 17, 2022
- Posted by: Accounting Equation
- Category: Knowlegebase
Loan for Start-ups
The toughest challenge an entrepreneur faces is securing funds for a new business. There are many options to choose from, so it’s important to know the benefits and drawbacks of each. Banks are one of the largest funders of start-ups in India. They provide loans to thousands of start-ups each year. Banks offer various types of loans to start-ups, including loans that can be obtained by willing businesses. The information in this article will tell you more about how Banks offer star-tup funding and how you can get started with this process. We will discuss the types of loan programs offered by banks and briefly go over some questions surrounding bank loans for Startup businesses in India.
Banks offer many loan types for all phases of businesses, including start-ups. The bank wants to see a viable business model, projected returns from the business, and how the business will pay back the loan before granting any assistance. Banks and financial institutions provide many types of loans to service a variety of businesses. Startup companies can avail of working capital loans or term loans, for example. Banks will lend to start-ups that have a good business plan, projected returns from the business, the ability to pay back the loan (through business), management experience and expertise, and security offered.
Banks typically want collateral for companies without proven business models, but it may be possible to get a loan with some other form of security. Banks are more likely to give loans for equipment as it is a fixed asset.
Further, if a business is looking for a bank loan for the research and development of any technology, they can get this type of a loan. An Asset-backed loan could be used to develop newer technology or market marketing or other business expansion efforts. The bank will offer an Asset-backed loan based on the market value of property that is residential, commercial, or industrial. Banks can lend up to 70% of the assessed market value. Additionally, promoters need to show the bank proof that their business will generate financial returns and how they will fund interest and principal payments on time.
Micro, Small, and Medium Enterprises can obtain capital without collateral by obtaining a loan under the Credit Guarantee Fund Trust Scheme for Micro, Small and Medium Enterprises (CGTMSE Scheme), which is made possible through banks’ lending up to Rs. 1 crore. The CGTMSE Scheme provides funding with no collateral security toward term loans and working capital requirements. Banks provide loans under the CGTMSE scheme selectively.
One of the schemes offered by financial institutions for start-ups is SIDBI’s Growth Capital & Equity Assistance scheme. This scheme provides access to capital for when a company requires it for their promotion, building a brand, expanding distribution networks, improving technical know-how, and the purchase of software. The bank will aid with projects that promote new innovative products and technologies. It can include areas such as unproven technology, a new product, or a process. This help is guaranteed to be in the form of “debt” funding with an interest rate no more than 5% per year
Before approaching any banker, it is important to create a pitch that outlines the business model, the promoter’s background, a revenue model, profit estimates, projected growth rates and possible returns. Once this information is gathered and compiled into a presentable format, such as a Detailed Project Report, the promoters can approach potential banks for funds. Keep in mind that the bank might not give what you are asking for if your request does not fit with their lending policy or lending schemes that they offer. With banks available in every country, and onsite banker, it is much easier to reach out and ask for money. Banks have a well-structured framework to process funding requests, which means faster approval process. All profits/losses also belong to the owner of the start-up, which means fewer heavy deals with venture capitalists and angel investors.