Bank loans for Indian startups

In India, undoubtedly one of the biggest pain points for startups is raising funding. It is required to help Micro, Small & Medium sized businesses in setting up and extending operations to encourage new products/services. India has a well-developed financial system, comprising banks, financial institutions, non-banking financial organizations and also venture capital companies. All these foundations cater to the diversified financial demands of the startups as well as existing businesses. Private Banks & financial institutes have implemented several schemes for capital needs of MSMEs. Entrepreneurs & have multiple economic options. Hence they need to recognise the pros & cons of each one of them. Banks & financial institutes offer loan assistance for start-up entrepreneurs.

Banks and other financial institutions provide loan assistance for startups during every stage of the business lifecycle. There is a provision of bank loans for startups, they approve the aid once they are pleased with the business model, marketing strategy expected returns, management experience & ability to pay back, etc. [1]

Startup loan in the shape of a line of credit operates similarly to a credit card. One of the biggest advantages of a small-scale business line of credit is that consumers will have no liability to pay interest on the borrowed sum for the first nine to fifteen months. Hence it is easier to cover expenses in early phases of starting the business.

For the young individual s with less exposure, banks only consider the credit score. Individuals who want loans to start their businesses are required to have a credit score above 700. Approval time can take a month after you have furnished a detailed credit report. However, there is no need not pledge any asset as collateral for this kind of loan.

With VC’s expecting 5-10 times return on their investment, bank loans turn out to be feasible as they do not require equity dilution and revert to the bank is fixed at a nominal amount of about 13-17%. Banks also have structured framework for processing funding request, and they are not involved in profit or loss of your business.

So it is a clear process to get loans from banks across India depending on your first pitch and assurance about your business growth and returns guarantee. The approval time, however, takes a long time (30-60 days) based on your submitted documents and you will have to contact them often.

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Process of getting bank loans for Indian startups

There are several banks in India which provide loans to the startups or businesses in India. Both public and private sectors banks will fund you for your business. It is easy to get a loan from a private sector bank, but it is recommended to take it from Public sector bank as their charges are pocket-friendly.

Once you have done the registration and got relevant document, licenses & clearances, you can approach a bank for a business loan. The first step is to make a pitch which is usually called DPR (Detailed Project Report). It should include all details about your business – Your product, the business model, marketing strategy, revenue model, business projections (for 3-8 years) and whether you are applying for capital or term loan or both. You should also mention whether your unit is eligible for any Government subsidy.

The bank officials will check your loan application, verify your credentials, make an assessment of the viability of product & then take a final decision. [2] Ensure that you have no default reference to you or other partners in CIBIL (Credit Information Bureau) or your loan proposal is likely to get rejected.

You are expected to contribute 25% of the Project cost, and Bank will finance maximum up to 75%. However, the Bank may ask you to increase your margin because it’s a new exposure for them. In today’s volatile credit situation, Banks are most certainly going to ask for tangible collateral security. (Like payment source, house, LIC, etc.)

The time taken for processing the proposal will vary between 30 to 60 days since there are several tiers your suggestion may have to pass through.

Volume and criteria

One can get any amount of investment from US$ 775 to US$ 10 Million regarding bank loan. It depends upon your need and scope of business.

Business loans applied for a variety of requirements, like launching a new product, expansions or a new purchase/collaboration. You can get a loan from the bank for your business if you have taken highest care in applying for one.

Make sure you have your credit score from CIBIL, and if you have good score then you have golden chances.
Make good pitch with detailed project report (DPR). Bank wants complete clarity about all risk factors as well as opportunities.
Show willingness to offer other assets (house, alternative payment sources) as collateral security. It reflects your commitment towards your business.

This basic homework can get your audience from many banks and then after it’s all about your plan of activities etc.

The capital money you have individually invested into your business is also significant from the bank’s perspective as it is the level of conviction you have in your own business.

For those venturing into business for the first time, it will be a bit tough to convince the bank that you are a loyal client. In these cases, banks will check your background, credit history, assets, business exposure, business plan and its capability. Hence, prepared and well-researched business plan shows how much dedication and passion you have for your business.

Collateral free bank loans for Indian startups

Micro and Small-scale Enterprises, especially the first generation of entrepreneurs, face difficulties in reaching out to a bank for credit because of their inability to provide adequate collateral security for loans. With an objective of providing the credit to SSI units, the government has approved Credit Guarantee Fund Scheme for MSME’s. With this fund, small industries can get a loan up to US$ 1 million without any guarantee or security. [3] Collateral Loan is available for start-ups if they fulfil below conditions;

It should be a private limited company and should have SME/SSI registration.
It should be funded by Angel or Venture Capital investor.
There should be a share purchase contract, and share allotment proof is mandatory.
The amount of funding for a project: 10% of promoters & 20% of investors (Angels, VCs, Large firms etc.)
Types of a loan – Term loan or a working capital aid will be granted.
A term loan is for a maximum period of 7 years and maximum moratorium period of 3 years.
The loan is covered under CGTMSE scheme.
Expenses for assistance under this scheme: Product overheads, purchase of equipment, tools & technology, processors etc. [4]

Specifics schemes for startups

India Aspiration Fund – Venture Fund
This is the fund announced by the new government, and you can check more details on a link provided. There are few existing Venture funds in which SIDBI made some partnership as well.
URL: http://trak.in/tags/business/2015/08/19/india-aspiration-fund-iaf-make-in-india-loan-startup-sme/
10K startups – 10,000 Startups | A NASSCOM Initiative
It is a NASSCOM initiative and has been doing a fantastic job in linking all stakeholders of Indian startup ecosystem.
SIDBI (Small Industries Development Bank of India)
It was set up for small industries, and there are many ways you can get financed by it. SIDBI Make in India Loan for ventures (SMILE) scheme with an investment size of Rs. 10,000 crore. The idea behind this program is to grant soft loans to MSMEs to meet the necessary debt-equity quota as also for pursuing opportunities for growth by existing MSMEs.
So this scheme is mainly assigned to small and medium scale industries. And if your industry is small or medium size then you can apply for this scheme.
Startup Village
The initiative supported by public & private sector as well as non-profit organisations. It has encouraged start-ups from Kochi and plans to expand in many areas of other states.
URL: https://inc42.com/resources/top-20-startup-incubators-india/
NSIC (National Small Industries Corporation)
NSIC is a Government of India initiative under Ministry of Micro, Small and Medium Enterprises (MSME). NSIC has been functioning to accomplish its mission of encouraging, supporting and nurturing the growth of small industrial firms and industry related micro, small and medium enterprises in the country.

Eligibility criteria for startup schemes

It must be an entity registered/incorporated as a: Private Limited Company or Registered Partnership firm or Limited Liability
The Age of company must not exceed five years
The annual turnover of company or business must not exceed Rs. 25 crore. (in any financial year)
The startup must be working towards innovation, development or commercialization of new products or services are driven by technology.
The Startup must aim to develop and commercialize:
- A new product or service or means; or
- A significantly improved existing product or service or process that will create or add value to customers or workflow.
The Startup must not merely be engaged in:
- Developing products or services which do not have potential for commercialization; or
- Undifferentiated goods or services; or
- Products or services with no or limited incremental value for customers
The Startup must not be formed by dividing, or reconstruction, of a business already in existence.
The Startup has received certification from the Inter-Ministerial Board, set-up by DIPP to validate the innovative nature of the firm, and
- Be supported by a suggested format specified by DIPP; or
- Be backed by an incubator which is funded by the government as part of any specified scheme; or
- Be supported by a suggestion in a format approved by DIPP from an incubator recognized by GoI; or
- Be supported by an Angel Fund/PE Fund/Accelerator/Angel Network duly registered with SEBI; or
- Be supported by the Government of India as section of any stated program to promote innovation; or
- Have a patent granted by the Indian Patent and Trademark Office [5]

Eligibility criteria for industry schemes

It should enrol as Society, Trust, Company or Section-8 Company, NBFC-MFI.
It should have been lending under MF for at least 36 months or should have promoters/senior management having at least ten years of experience in microcredit operations.
It should have a minimum outreach of 5,000 loan accounts or 3,000 customers.
It has audited financial statements.
It has systems, processes and procedures in place required of a financial intermediary like internal accounting, internal audit, risk management, etc.
It shall be in compliance with RBI and other statutory guidelines including Fair Practices Code and RBI circulars issued and updated from time to time.
Its micro-finance program is focused towards poverty reduction, and most clients are poor, especially women and are secular.
It should choose indigent clients, particularly women, regardless of class, creed, and religion, and its activities should be secular in nature.
MFI may follow any general practice MF models like Grameen model, SHG model, JLG model and any other suitable model permitted under the law.
It has its statements audited by an external auditor on an annual basis or agrees to do so immediately after SIDBI sanctions the loan. [6]

Key points for getting bank loans for Indian startups

Make a right pitch with Detailed Project Report (DPR)
Business Plan
Get a copy of CIBIL report with score
Get together some essential financial statements like ID proof, Address proof, Bank statement, and latest ITR. (Income, Balance sheet, profit & loss information)
Prediction of expected operations (Growth, ROI, Expansions, etc.).
Any other specific documents needed by respective bank

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