How to get a Start-up Business Loan?

How to get a start-up business loan: Since its announcement in 2015, the Startup India campaign has led to an increase in the number of new medium-sized businesses (MSMEs). The objective of this campaign is to promote financial assistance for startups. It has encouraged startups, which will lead to more job creation and contribute to the economic growth of the nation.

How to get a Start-up Business Loan?

Eligibility Criteria for Start-up Business Loan

  • The firm should have a business plan.
  • The startup should be in the form of a private limited company or limited liability partnership.
  • The total business of the firm should not exceed Rs. 25 crores.
  • The company should have approval from the Department of Industrial Policy and Promotion (DIPP).
  • The startup should obtain protective guarantees from the Indian Patent and Trademark Office.

Types of Start-up Business Loan

  • Mudra Loan Scheme: The Mudra Yojana is the most popular scheme among India’s youth. The Micro Units Development and Refinance Agency (MUDRA) loan scheme, initiated by the government, is designed for small and medium enterprises. Under the Mudra scheme, loans are provided in three categories named Shishu, Kishor, and Tarun. Applicants can avail loans up to Rs. 50 thousand in the Shishu category, up to Rs. 5 lakhs in the Kishor category, and up to Rs. 10 lakhs in the Tarun category.
  • CGTMSE Scheme: The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) is another government initiative that provides funds to small and medium businesses through financial institutions such as banks and NBFCs. This scheme has benefited entrepreneurs and startup ventures on a large scale for the first time. Under the CGTMSE scheme, there is no requirement for security or collateral for the loan.
  • Equipment Finance: This scheme provides loans for purchasing equipment/machinery for businesses. The equipment/machinery purchased for obtaining the loan is kept as security/collateral with the bank. As the loan is provided against security, the interest rate on the loan is comparatively lower.
  • Business Installment Loan: Business installment loans are provided by major banks such as Standard Chartered and ICICI Bank. These loans can be taken for immediate cash requirements and business expansion. It falls under the category of personal loans to a large extent, as it is an unsecured loan. However, the bank keeps this loan secure at lower interest rates.
  • Equity Assistance Scheme and Capital for Development by SIDBI: Entrepreneurs can now avail loans for their startups from banks in this specific category. Many banks and financial institutions offer loan schemes designed specifically to meet the needs of startups and their special requirements. Different banks provide loans for startup businesses under different names. For example, SIDBI bank offers loans under the name “Growth Capital and Equity Assistance” scheme, which can be used for purposes such as business expansion, machinery purchase, raw material purchase, marketing, brand building, distributor network creation, R&D, software purchase, etc. Many other banks provide funding for startups.

Benefits of taking start-up business loan from banks

Taking a business loan from banks for startups can be more advantageous compared to borrowing from other financial institutions. The benefits of startup businesses are as follows:

  • Tax relief is provided for new businesses for up to 3 years.
  • Raising funds from investors can be expensive for startups, as investors expect returns on their investment to be 5 to 10 times higher. In contrast, bank loan interest rates are lower.
  • Accessing banks is easier. There are many banks available in India.
  • Banks have an established framework for lending to businesses. On the other hand, the process of borrowing funds from investors is more complex.
  • Another significant advantage is that the profit (as well as the loss) of the business belongs solely to the loan recipient. Applicants are not liable to banks for the profits and losses of their businesses.

What should banks know about start-up businesses and entrepreneurs?

Entrepreneurs should consult with their bankers or financial advisors so that banks can provide necessary information and appropriate advice about the business. Banks should have information about the applicants, such as business liabilities, whether the business owner has pledged any property, etc., as the lack of such information can lead to difficulties later on. Banks may require documents such as applicant’s identification, applicant’s and business profile, business details, bank and other references, and proof of company ownership and registration.

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