Securing funds for a new business is a challenging task for entrepreneurs. There are various funding options available, and it is crucial for entrepreneurs to understand the advantages and disadvantages of each funding method. They need to estimate the amount of funds required, how they will be used, and predict the financial position of the business, including the returns generated. Entrepreneurs should develop a strategy to approach and obtain the necessary funds. While venture capital firms and angel investors are often highlighted as great sources of funding for startups, many entrepreneurs are unaware that banks and financial institutions are also potential funding avenues. In fact, banks are one of the primary funders of startups in India, providing funds to thousands of startups annually. This article explores the different types of funding available from banks, such as loans, and addresses common questions about bank loans for startup businesses in India.
Are startup businesses eligible for loans from banks?
Certainly, banks and financial institutions offer financial aid to businesses at any point in their lifespan. New businesses have the option to obtain various forms of loans, such as term loans, working capital loans, or asset-backed loans, depending on their specific needs. If banks are confident in the business model, projected profits, repayment capability (either through the business or otherwise), management expertise, and any additional security provided, they are willing to lend to startups as well.
Can banks offer loans to startup businesses in unconventional industries?
In industries where new companies are venturing into uncharted territory without an established business model, banks usually require more extensive collateral security. They often prefer additional sources of income or backup sources in addition to collateral. However, if these conditions are met, banks are also willing to provide loans to startups with innovative business models.
Is it possible for a startup to obtain a bank loan to support their research and development of technology?
Banks can provide loans for research and development of technology, such as asset-backed loans that can be used for various business purposes like developing new technology or expanding marketing efforts. These loans are given based on the market value of a property, whether residential, commercial, or industrial. The bank will lend up to 70% of the assessed market value of the property for a loan term of 7-15 years. In addition to offering collateral security, the loan applicants must show the bank expected financial returns from the business and the source of funds to meet loan interest and principal payments on schedule.
Can I obtain a bank loan to purchase equipment or machinery as a startup company?
Yes, a startup can obtain term loans from banks Banks are more willing to grant loans when it comes to purchasing, installing, or commissioning capital assets like machinery or equipment that will be used for business purposes.
Is it possible for a startup to obtain a bank loan in order to purchase inventory for stocking purposes?
Yes, a startup can obtain loans provided by banks specifically for working capital needsBanks aim to evaluate the amount of working capital a business needs for stocking inventory or offering credit to customers. They will analyze the projected numbers and adopt a cautious approach when loaning working capital funds.
Is it possible for startups to obtain a bank loan without providing any form of collateral?
CGTMSE) was launched by the Government of India to provide collateral-free credit to small businesses. This scheme helps small businesses access credit facilities from banks without having to provide any form of collateral or security. Under the CGTMSE, banks can provide loans up to a certain limit to eligible borrowers, and the trust fund will guarantee 75-85% of the loan amount in case of default. This scheme aims to promote entrepreneurship and provide financial support to small businesses. CGTMSE Scheme The paragraph explains that banks can offer loans up to Rs.1 crore to businesses without requiring any collateral security for their term loan and working capital needs, excluding marketing or technology development purposes. This gives startups the opportunity to obtain loans without having to provide collateral for capital assets or inventory. However, banks only provide these loans to deserving entrepreneurs who have a strong financial and managerial background. As a result, only a small number of startups are able to secure funding from banks through this CGTMSE scheme to start their business operations.
Are there any particular financial options or plans intended for newly established businesses?
Numerous banks and financial institutions provide programs specifically designed for new businesses. One such example is the offering from SIDBI known as "Growth Capital & Equity Assistance," which is targeted towards Small and Medium Enterprises (SMEs) in need of funds for expansion. The funds obtained through SIDBI's scheme can be utilized for various purposes, such as marketing, establishment of brand, establishing distribution channels, acquiring technical knowledge, conducting research and development activities, and purchasing software.
SIDBI offers the SRIJAN Scheme, known as the SIDBI Revolving Fund for Technology Innovation, to provide financial assistance to MSMEs in their pursuit of developing, scaling up, demonstrating, and commercializing innovative technology-based projects. The assistance is in the form of early-stage debt funding, with favorable terms, for projects related to emerging technologies, unproven technologies, new products, processes, etc., that have not yet been successfully commercialized. The maximum assistance provided per project is generally up to Rs. 1 crore. The interest rate is determined by the Project Approval Committee (PAC) and will not exceed 5% per annum.
What is the best way for a startup to seek funding from a bank?
Before approaching a banker or investor to request funding, the business promoters need to create a presentation that details important information about the business model, background of the promoters, revenue and sales projections, estimated profit and growth rate, and potential returns. Both banks and equity investors consider return on investment as a crucial factor. Therefore, it is essential for the promoters to gather and organize this information in a presentable format, such as a Detailed Project Report. Once the investment pitch is prepared, the promoters should research potential banks or institutions that offer funding schemes suitable for their needs. It is important for the promoters to structure their request in a way that aligns with the lending policies of the Reserve Bank of India and the specific banks, ensuring they are not seeking funds for marketing from institutions that only provide term loans. Once these initial steps are completed, the promoters are ready to approach the bankers, present their pitch, and formally request funding.
What are the benefits of obtaining a bank loan to fund a new business venture?
There are several advantages to obtaining a bank loan instead of venture capital during the early stages of a startup. Firstly, venture capital funds can be quite expensive, as investors typically expect a significant return of 5-10 times their initial investment. Conversely, bank loans do not require the dilution of equity and typically have a lower rate of return, around 13-17%. Secondly, banks are easily accessible, with branches available across India. This makes it simpler to approach a local banker for funding, as opposed to trying to meet with a venture capitalist or angel investor. Additionally, banks generally have a well-established framework for evaluating funding requests, resulting in faster processing times compared to venture capitalists or angel investors. Lastly, by obtaining a bank loan, the profits or losses of your business remain solely yours.