Bank Loan for Startup Business

Raising funds is one of the most difficult challenges an entrepreneur faces when starting a new business. With so many funding options available, it is critical for the Entrepreneur to understand the advantages and disadvantages of each funding methodology, estimate the number of funds required, the application of funds, the projected financial position of the business, including the returns generated, and develop a strategy to approach and secure the required funds.

Many entrepreneurs are unaware that financial institutions and banks are also a source of funding for startups, despite the fact that venture capital firms and angel investors have received a lot of press as wonderful sources of funding for a startup. In reality, banks are one of the main investors of startups in India, with thousands of firms receiving money each year. In this article, we’ll go over the many sorts of bank loans accessible, as well as a slew of other topics related to bank loans for startups in India.

Bank Loan for Startup Business

Do banks provide loans for a startup business?

Yes, banks and financial institutions offer financial aid to businesses at every level of their development. Depending on their needs, startups can get a variety of term loans, working capital loans, or asset-backed loans. Banks will lend to a startup if the business concept, estimated returns from the firm, ability to repay the loan (through business or otherwise), management experience and competence, and other security given are satisfactory.

Will banks provide loans for startups in novel areas?

Banks will often want higher collateral security coverage for enterprises beginning up in new regions where the business model has not yet been established, typically with alternative sources or backup sources of income. Banks will lend to a startup with unique business concepts if the same can be offered.

As a startup, can I get a bank loan for research and development of technology?

Yes, a bank loan for research and development of any technology is available. Asset-backed loans can be used to fund the development of newer technology, as well as marketing and other forms of business expansion. Asset-backed loans are provided by the bank and are based on the market value of a residential, commercial, or industrial property. Banks lend up to 70% of the property’s assessed market value for a loan term of 7 to 15 years. In addition to the collateral security supplied, the promoters must show the Banker the financial returns expected from the firm as well as the source of cash necessary to meet the loan’s interest and principal commitments on time.

As a startup, can I get a bank loan for buying equipment or machinery?

Yes, a startup can get a term loan from a bank to buy machinery or equipment. Banks are more willing to lend money for the acquisition, installation, and commissioning of capital assets such as machinery and equipment for commercial use.

As a startup, can I get a bank loan for stocking inventory?

Yes, a business can get a working capital loan from a bank to stock merchandise or give customers credit. Banks will try to analyze a business’s working capital needs based on the projections supplied and will lend working capital money cautiously.

Can startups get a bank loan without any collateral security?

The Credit Guarantee Fund Trust Scheme for Micro, Small and Medium Enterprises (CGTMSE Scheme) establishes a framework for banks to offer loans up to Rs.1 crore to businesses for term loans and working capital (NOT for marketing or technology development). As a result, startups in need of capital assets or inventory can take advantage of the CGTMSE plan to secure collateral-free bank loans. Banks make loans under the CGTMSE programs only to the most deserving entrepreneurs with exceptional financial and management skills. As a result, only a small percentage of companies receive capital from banks under the CGTMSE scheme to begin operations.

Are there any specific loans or schemes for startups?

Yes, many banks and financial institutions have startup programs. SIDBI, for example, provides “Growth Capital & Equity Assistance” to SMEs in need of capital. SIDBI’s “Growth Capital & Equity Assistance” plan money can be utilized for marketing, brand development, distribution network development, technical know-how, R&D, and software acquisition.

SIDBI also offers the SIDBI Revolving Fund for Technology Innovation (SRIJAN Scheme), which helps MSMEs with project creation, upscaling, demonstration, and commercialization. The bank offers early-stage “debt” financing on more favorable conditions for the development, demonstration, and commercialization of new ideas in developing technological fields, unproven technologies, new goods, processes, and other items that have yet to be successfully marketed. In most cases, maximum aid is limited to Rs. 1 crore per project. The Project Approval Committee (PAC) would decide on the interest rate (not be more than 5 percent p.a.).

Bank Loan for Startup Business

How should a startup approach a bank for funding?

The promoters of a firm must first prepare a pitch that outlines the business model, promoters’ background, revenue model, estimated sales, estimated profit, estimated growth rate, and returns before approaching a banker or an investor with a request for money. For both banks and equity investors, return on investment is critical. As a result, it is critical for the promoters to first gather, analyze, and compile the data in a presentable style (which could be a Detailed Project Report). When the investment pitch is finished, the promoters should preserve a list of possible identification banks that have schemes or the ability to provide the needed funds. It is critical for the promoters to arrange their request in such a way that it fits within the scope of the RBI’s and banks’ lending policies, such as not requesting funds for marketing from a bank that only offers term loans. They can approach financiers, give their presentations, and request money once the first two processes are completed.

What are the advantages of securing a bank loan for a startup business?

If a firm can acquire a bank loan instead of venture funding in the early stages, there are a number of advantages. 1) Venture capital funds are quite expensive, with VC investors anticipating a return of 5-10 times their investment. Bank loans, on the other hand, do not involve equity dilution, and the bank’s rate of return is already at 13-17 percent. 2) Banks are more accessible. With banks located throughout India, approaching your local banker and requesting funding for a meeting with a Venture Capitalist or Angel Investor has never been easier. 3) Created a system for evaluating financing. For processing funding requests, banks have a well-structured system. As a result, as compared to a venture capitalist or angel investor, an answer to your funding request will be processed more rapidly. 4) You are the sole owner of your company’s gains and losses.