The number of startups in India is increasing at an alarming rate, as startup owners have access to many private equities and debt funding options. Getting a loan after your well-established startup is easy, but it is quite challenging to get funding when the business is just an idea or is in the early stage. Every entrepreneur needs capital to run their business and seeks a startup business loan. Financial support during the initial stage is very important because, as a new business setup, funds are required to set up the entire operation, including planning operations, marketing or hiring staff, etc.
The Micro, Small, and medium enterprises (MSME) sector in India only has limited access to formal credit, which is why initiatives are coming up to roll out a startup business loan scheme for MSMEs and startups. India has a variety of funding options. From banks to NBFCs, there are a greater number of financial institutions than one can count, and most of them provide startup loans.
What is a startup loan?
As the name suggests, a startup business loan which any financial institution provides. It works similarly, just like a credit card. Every month you have to pay an interest rate. Banks and other financial institutes will grant the startup loan once convinced of the business model and can see the company’s future growth and profit-making capacity.
Benefits of getting a startup loan for new business
The following reasons explain why you should opt for a business loan:
1. Low-interest rate – Compared to angel funding, financial institutions ask for a lesser return in the form of a low-interest rate. The interest rate will depend on the company’s and the entrepreneur’s credit score.
2. Simplified process – It is extremely easy to approach a financial institute for a startup loan compared to trying to get in touch with investors and seek funding from them.
3. No profit sharing – Another important benefit of a startup loan is that you will not have to share your profits with the institute. Your profits belong to you only. Whereas in a setup where your company gets funded by an angel investor, you will have to include them in your company profits.
Planning a startup nowadays is easy. A new startup can enjoy tax exemption for three years. The owner is not answerable to the bank if the startup gets good profits or undergoes loss. Any significant gain or loss belongs to the startup solely.
Documents required for startup loan in India
* Identity Proof – A passport, PAN card, Aadhaar card, driver’s license, or voter Id can serve this purpose.
* Address Proof – Electricity bills, telephone bills, passports, Aadhaar cards, or voter IDs can serve this purpose.
* Financial statement – Documents that prove stable income must be provided.
* Age proof – Any document that shows your age, like a copy of the passport or the PAN card, can be submitted.
* Bank statements – The last six months’ bank statements are to be submitted. You can also give a scanned copy of the canceled cheque to give IFSC code proof.
* Photo and signature – 2 copies of the passport-size photo are required. Bank-verified statements or PAN cards will submit the proof of signature.
* Financial statement and IT return, audited by a CA for the past two consecutive years.
Eligibility criteria for startup business loan
Each financial institution has different eligibility criteria. Here are some standard criteria that you must know before applying for startups –
* The minimum age of the applicant applying for the loan must be more than 18 years or above.
* They must be a citizen of India and be free from any criminal case or record.
* They must not be a loan defaulter in any financial institute/corporation.
* The credit score of the applicant must be good. 700 or above is generally considered to be an excellent score.
* The startup for which the applicant is applying loan must be formed as a sole proprietorship or partnership.
Velocity’s Revenue-Based Financing – A better alternative
The traditional process of getting a startup business loan is tedious and painful. That’s why modern startups are now looking at new financing options like revenue-based financing
Revenue loans or recurring loans are actually equity-free loans where the financier gets repayments as a percentage of the borrower’s revenues making it a lucrative option for founders needing working capital for their business.