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Exploring Bank Loans as a Funding Option for Indian Startups

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  • Post published:October 15, 2023
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Last Updated on October 15, 2023 by Sumitha

Bank Loans for Indian Startups

Securing funds for a startup is undeniably one of the most daunting challenges for any aspiring entrepreneur. In the Indian entrepreneurial landscape, where funding options abound, startup founders must comprehend the nuances of each funding method. This understanding empowers entrepreneurs to estimate their financial needs, plan the allocation of funds, project the business’s financial health, and devise a strategic approach to secure the necessary capital.

While venture capital firms and angel investors often dominate the spotlight as potential sources of funding for startups, a lesser-known avenue is frequently overlooked: financial institutions and banks. Surprisingly, banks play a significant role in funding startups in India, supporting thousands of new ventures yearly. In this article, we delve into the various funding options available through banks, specifically focusing on loans, and address common questions regarding bank loans for startup businesses in India.

Banks Loans for Startup Businesses

Banks and financial institutions extend financial assistance to companies across all stages of their life cycle, including startups. Startup enterprises can access a range of term loans, working capital loans, or asset-backed loans tailored to their specific needs. Banks are willing to lend to startups if they are convinced of the business model’s viability, the projected returns, the ability to repay the loan (either through business revenues or alternative means), the management team’s experience and expertise, and the security provided.

Will Banks Fund Startups in Novel Areas?

Startups venturing into uncharted territories or novel business areas may encounter higher requirements for collateral security. Banks may insist on additional collateral or alternative income sources to mitigate risks. However, if startups can meet these criteria, banks are open to extending funding even to those with innovative business models.

Can Startups Secure Bank Loans for Research and Development of Technology?

Yes, startups can obtain bank loans for research and development (R&D) efforts, including developing new technologies. Asset-backed loans are commonly used to fund such initiatives. These loans are secured against residential, commercial, or industrial properties, with banks typically lending up to 70% of the property’s assessed market value. Alongside collateral, startups must demonstrate to the bank their anticipated financial returns from the R&D project and their ability to punctually meet interest and principal payments.

Can Startups Secure Bank Loans for Equipment or Machinery?

Indeed, startups can secure term loans from banks to acquire equipment or machinery necessary for their operations. Banks are generally amenable to extending loans to purchase, install, and commission capital assets like machinery and equipment.

Can Startups Secure Bank Loans for Inventory?

Yes, startups can obtain working capital loans from banks to finance inventory requirements or offer credit to customers. Banks assess working capital needs based on projections provided by the startup, but they typically adopt a conservative approach when disbursing working capital funds.

Can Startups Obtain Bank Loans Without Collateral Security?

The Credit Guarantee Fund Trust Scheme for Micro, Small, and Medium Enterprises (CGTMSE Scheme) offers a framework for banks to provide loans of up to Rs. 1 crore without requiring collateral security for term loans and working capital needs. This scheme is particularly beneficial for startups seeking capital assets or inventory financing. However, loans under the CGTMSE scheme are highly selective and primarily awarded to deserving entrepreneurs with strong financial and managerial acumen. Therefore, only a few startups secure funding through this scheme to kickstart their operations.

Are There Specific Loans or Schemes for Startups?

Indeed, several banks and financial institutions offer specialized schemes to support startups. For instance, SIDBI offers the “Growth Capital & Equity Assistance” scheme for SMEs seeking growth capital. These funds can be used for marketing, brand development, distribution network-building, technical expertise, research and development, and software acquisitions.

SIDBI also provides the SIDBI Revolving Fund for Technology Innovation (SRIJAN Scheme), which offers financial assistance to MSMEs engaged in innovative technology-based projects. This scheme primarily focuses on supporting innovative technology solutions’ development, scaling, demonstration, and commercialization. The scheme provides early-stage debt funding with favourable terms, with maximum assistance typically capped at Rs. 1 crore per project and interest rates not exceeding 5% per annum.

How Should Startups Approach Banks for Funding?

Before approaching banks or investors for funding, startup founders should meticulously prepare a comprehensive pitch outlining key business aspects. This pitch should encompass the business model, founder profiles, revenue model, sales and profit projections, anticipated growth rate, and expected returns. Return on investment remains a pivotal factor for banks and equity investors, so having a well-structured and presentable business plan is essential.

Once the investment pitch is ready, startup founders should identify banks that offer funding options matching their specific requirements. It is vital to align the funding request with the lending policies and schemes of the chosen bank. Once these preliminary steps are completed, founders can approach the bank, present their pitch, and formally request funding.

Advantages of Securing a Bank Loan for a Startup Business

Securing a bank loan for a startup business offers several advantages over seeking venture capital at the initial stages:

  1. Cost-Effective Funding: Venture capital can be costly, with investors often expecting significant returns. Bank loans typically do not require equity dilution, and the interest rates are relatively nominal, ranging from 13% to 17%.
  2. Accessibility: Banks are widespread throughout India, making them easily accessible for startup founders. The process of approaching a local bank is often simpler and more convenient than courting venture capitalists or angel investors.
  3. Expedited Funding Process: Banks follow structured procedures for evaluating funding requests, resulting in quicker response times compared to the often lengthy negotiations with venture capitalists.
  4. Ownership Retention: When a startup secures a bank loan, the ownership and profits of the business remain exclusively with the founders, minimizing equity dilution.

Conclusion

In conclusion, while the startup ecosystem in India presents a multitude of funding avenues, entrepreneurs should not overlook the substantial support offered by banks and financial institutions. Whether collateralized or through specialized schemes like the CGTMSE and SIDBI programs, bank loans can be a viable and cost-effective funding source for startups. By understanding the requirements, advantages, and opportunities associated with bank loans, startups can effectively navigate the path to securing the necessary capital to launch and grow their businesses. In a landscape where innovation and entrepreneurship thrive, bank loans are a promising avenue for fueling the dreams of aspiring entrepreneurs across India.

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Sumitha

I'm a professional content creator passionate about writing. My articles span law, business, finance, investments, and government schemes, always simplifying complex topics. Exploring and embracing novelty are my off-duty joys.