Complete Guide on How to Compare the Best Start-up Business Loans

A creative company concept and a strong core team are insufficient to create a billion-dollar corporate empire. 

When not adequately financed, these projects often fall short of being implemented. Although it would seem that angel investors and venture capitalists are the sole sources of financing for businesses.

Start-up business loans are one of India’s most popular forms of financing. This article provides all the information you need to identify the best finance source for your start-up, small company, or MSME (Micro, Small, and Medium Enterprises).

What is a Loan for a New Business?

Start-up loans are loans given to firms by financial institutions (not to be confused with personal loans). The institution decides for the future, knowing that the capital will be repaid with interest.

This loan may be used by businesses as working capital to cover short-term cash flow needs and to buy machinery and other equipment. 

Using start-up business loans provides many benefits for entrepreneurs. The following are some advantages of using start-up company loans:

• You have enough money to expand your company’s activities.
• You are not required to give up your ownership rights or equity.
• For future loans, you may increase your business’s credit score.
• You may prevent a loss of your fortune that is unparalleled.
• You are not required to account to the bank for the revenue and expenses of your company.

Receiving a startup company loan has advantages, but there are also some drawbacks. Using startup company loans as leverage has several drawbacks.

• It takes work to be eligible for the loan! Lenders have different requirements, and new businesses may have trouble meeting them.
• The monthly payment might reduce your available cash flow.
• Your credit score will be affected if you don’t pay your EMIs.

How do I apply for a loan for a new business in India?

In India, applying for a startup loan is rather simple. You may approach this in one of two ways:

• You may submit an online loan application by going to the lender’s official website. For the most part, merchants provide an online form that must be completed and submitted together with other papers (keep reading to know what documents you will need while applying for a startup business loan in India).
• You may get an application form immediately from the lender’s closest branch office, complete it, and submit it there along with the necessary supporting papers.

8 Important Types of Startup Business Loans Available in India

In India, startups can access a wide range of business credit options. The following are the top eight leveraged startup company loans:

• A Loan Used for Working Capital 

Also known as collateral-free loans, firms use working capital loans to fund their ongoing working capital needs. 

Working capital loans often have a short payback duration of up to a year. Working capital loans have a shorter term, which results in a higher interest rate.

• Term Loan (Short & Long-Term Loan) 

One of the most popular types of loans, term loans, must be repaid over a certain time frame. 

These may be roughly divided into long-term loans (more than one year) and short-term loans (up to five to ten years). 

The lender determines the duration of the loan based on the amount of funds required.

• Letter of Credit 

A letter of credit is a sort of credit limit often used by firms engaged in trade. It entails the lender providing financial guarantees to the businesses’ suppliers. 

An effective LoC is essential to maintaining international commerce since both import and export often deal with unknown circumstances.

• Overdraft Facility 

An overdraft facility is a loan provided by banks that enables company owners to withdraw money even when their account has no balance. 

Interest is assessed on the amount deducted from the authorised limit each day. This company loan is given in exchange for collateral, a bank FD.

• Equipment Finance or Machinery Loan 

As the name implies, lenders provide an equipment or machinery loan to help borrowers buy equipment for their businesses. 

While the specifics vary depending on the lender, firms that use this loan are granted tax breaks by the Indian government.

• Government-Sponsored Loans 

The Indian government has some loans available that are designed only for businesses within 59 minutes, the Mudra Scheme within PMMY, PMEGP, CGTMSE, Standup India, Startup India, and PSB Loans. Following are some of India’s most well-known government credit schemes:

• Invoice Financing

By borrowing money against the sums owed by their clients, companies may do so via invoice finance. It enables companies to pay their staff and suppliers, increase cash flow, and reinvest in their core company. 

Businesses pay the lender a loan fee based on a percentage of the invoice total. The consumer may not know that their invoice has been financed, thanks to how invoice financing is set up, or the lender may handle it.

• Merchant Cash Advance

In exchange for a portion of their daily credit card revenue, businesses can obtain cash from merchant cash advance companies directly from the processor that clears and settles credit card payments.

The loan size depends on how much money you make from monthly card sales. Some lenders will calculate your eligibility up to 200% of the value. The eligible amount for an advance increases with your sales. The list continues after that. 

After learning about the various forms of startup company loans offered in India, let’s examine the requirements for applying for these loans.

Requirements for a Startup Business Loan

The requirements for new enterprises seeking startup loans vary depending on the lender, as was previously mentioned. As a result, the majority of Indian lenders are required to meet the following requirements:

1. If you’re an Indian citizen who lives there, that would be helpful.
2. It would be beneficial to have a CIBIL score of at least 700.
3. Your business should have been operating for at least two years.
4. Your company should make at least INR 2 lakhs each year.
5. Ages should range from 21 to 65 years old.
6. It would be ideal to have a strong business strategy with a realistic timeline.

Remember

1. The bank may decide to limit the loan amount if the CIBIL score is on edge.
2. Important elements like turnover, partner/director compensation, depreciation, interest expense, and net profit after taxes determine the loan amount.
3. The debt service coverage ratio (DSCR) shows the borrower’s capacity to pay the proposed loan’s EMI. A DSCR of 1.0 to 1.5 is often required by banks.

Documentation Needed to Apply for a Business Loan for a Startup

Let’s look at some of the important documentation you’ll need to have the loan authorised now that you are aware of the eligibility requirements for receiving a startup company loan:

• Passport, a PAN card, an Aadhaar card, a driver’s license, or a voter ID that also serves as evidence of age
• Completed loan application 
• Two passport-sized photos
• Energy bills, a passport, an Aadhaar card, or a voter ID may be used as address proof.
• Evidence that you are the owner of the firm
• Income Statement: Evidence of the applicant’s consistent income
• Bank statements from the previous six months
• Financial statements that have undergone two years’ worth of CA audits

Conclusion

In this post, you looked at the process for applying for business loans for a start-up in India, as well as information on various banks and government programmes that provide business loans for start-ups. This article will provide you with all the information you need before applying for a business loan for your new venture. For additional information, visit Piramal Finance.