You may require additional funds as a business owner that are not available through your operations. You could need this money for things like equipment purchases or expanding your business.
Because some operations are seasonal, you may need this fund to offset the costs of extra advertising or raw material purchases.
This is when business loans come in handy.Bare referred to as business financing. New business financing options are also offered by many financial organizations.
The borrower, like any other loan product, must repay the money plus interest on a predetermined delayed payment plan via EMIs within a certain timeframe.
India entrepreneurs are growing continuously owing to a congenial ecosystem and access to a variety of financing options.The loans to business comes in a variety of forms, a government scheme, banks, and NBFCs.
Each has its own criteria for granting such loans, but one thing is for sure if one has a business that is viable, obtaining a business loan in India is not problematic.
What is a Business Loan?
A business loan is a type of financing provided to eligible businesses from traditional banks, the government, and non-bank financial institutions (NBFIs).
This money can be used to cover costs connected with running and growing a firm, such as operational capital and technology purchases, as well as large investments like real estate.
Business loans provide capital in the form of a single payment or a line of credit to business owners. In exchange for this cash, the business undertakes to repay the principal, plus interest and fees, over a certain period of time.
Different type of Business loans:
1. Overdraft/ Line of Credit
Overdraft or line of credit is a type of financing available to businesses, and it may be obtained from both traditional banking institutions and non-banking financial institutions (NBFCs).
Businesses are charged fees for using excess funds from their line of credit, which may be repaid by depositing the funds and paying interest.
Business overdrafts are a frequent method of funding small and medium-sized businesses (SMEs), and they're great for companies with erratic cash flow. They might be offered for a certain length of time or as continuous service with no end date.
Equity Funding
Equity funding is a method of obtaining funds to meet a company's liquidity requirements by selling the company's equity. The promoter's investment in the company will decide the proportion of interest.
Aside from public offers, Venture Capital is a common technique to raise capital. VC financing is a method of raising capital from wealthy individuals who are interested in a range of investment opportunities.
Once the investment objectives have been completed, a business owner with equity finance can maintain the opportunity to purchase back shares to return to desired ownership levels.
Equipment Finance
Equipment finance refers to a loan used to purchase business equipment. Other than real estate, business equipment includes office furniture, computer equipment, industrial machinery, medical equipment, and company vehicles.
Equipment financing is critical to company operations for various reasons. For starters, equipment financing may be required to get a new business or startup business up and running.
Second, because equipment financing is frequently used to purchase expensive equipment, the debt obligation incurred is significant.
As a consequence, business owners or executives should carefully analyze each equipment financing approach in order to obtain the best possible financing terms.
A short-term business loan is a loan that allows business owners to access funds for things like short-term payroll obligations, unanticipated bills, or other cash flow difficulties.
Annual percentage rates for short-term business loans vary depending on the kind of funding, lender, and borrower's creditworthiness.
Short-term business loans are similar to typical business loans but they have shorter payback durations. Short-term repayment durations often run from three months to three years, but they are frequently less than 12 months.
Shorter repayment terms not only result in larger monthly payments, but short-term business loans may also need more frequent payments.
Account receivables loans
Account receivable loans are a type of short-term financing in which the business uses its receivables as collateral to borrow money from a lender.
The lender would normally lend a fraction of the face value of the receivables, such as 80%. The percentage is determined by the quality of the receivables; the greater the quality, the higher the percentage.
The receivables are still owned by the borrower, who is responsible for collecting from their debtors. Businesses typically employ AR loans when they are quite confident about the payments.
There is a risk that a business would be jammed between the bank and the debtor.
Factoring/Advances
A factoring advance is a proportion of the invoice value that a factor will pay you when the receivables are sold.
This is not the total amount your firm will be paid for the invoices; you will receive the rest minus the factoring costs when your clients pay you.
Factoring enables a company to get immediate cash or funds based on the expected future income associated with a certain amount owed on an account receivable or a business invoice.
Accounts receivables are the funds owing to the firm by its customers for credit sales.
Trade Creditor
A trade creditor is a supplier who has delivered your business products or provided services but has not yet been paid. the transaction is done on trade credit.
The most basic definition of trade credit is a contract to purchase products and/or services on an account without making immediate cash or check payments.
When favourable conditions are agreed upon with a business's supplier, trade credit may be a useful tool for developing firms.
This plan effectively relieves the financial strain that quick payment would impose. This sort of financing aids in the reduction and management of a company's capital requirements.
The Indian government has beenB by providing a number of incentives to assist them in raising funds. This effort resulted in over 28,000 enterprises in India by February 2020. As the focus changes to B, this number is expected to skyrocket.
There are presently over B companies in India that have access to a variety of private equity and debt financing options. TheB that new, small, and medium-sized businesses encounter.
The government is fostering the culture and environment for start-ups as part of its goal to create an "Atma Nirbhar Bharat." A thriving start-up culture, as well as entrepreneurial investment, is established to help the country and enterprises grow.
The Indian government is doing everything it can to number of start-ups in the country.
Sustainable Finance scheme – launched in 2012-2013
The Small Industries Development Bank of India established the Sustainable Finance plan to give financial help for project development and to increase energy efficiency and cleaner output.
Funding is provided for initiatives that are not covered by international lines of credit, such as eco-friendly labelling, green building development, green microfinancing, or renewable energy projects.
This program pays up to 90% of the cost of the project as submitted by the MSME. Under this plan, the lowest loan amount is Rs.10 lakh and the maximum loan amount is Rs.150 lakh per qualifying borrower.
The payback duration for loans up to Rs.50 lakh is 36 months, and for loans beyond Rs.50 lakh, it is 60 months, including a 6-month initial moratorium period.
- The loan's interest rates are set based on SIDBI's internal rating of the MSME.
- The borrower is responsible for a ten percent margin.
- The loan is secured by the hypothecation of the assets bought.
- Wherever it is regarded essential for proper asset coverage, collateral security may be requested.
- Cover for CGTMSE is allowed.
Credit Guarantee Scheme: (Launched 2000)
The Government of India has introduced the Credit Guarantee Scheme, which would make bank credits available to businesses.
If the entrepreneur fails to repay the loan within the specified period, the credit guarantee trust will reimburse the lender up to 50 percent, 75 percent, 80 percent, or 85 percent of the loss.
Any collateral third party guarantee for free credit facility given by an Eligible institution to new and existing micro and small businesses would be capped at 200 lakhs.
The financing facility for micro-enterprises up to Rs 5 lakh comes with an 85 percent guarantee.
The credit guarantee plan extends from the date of payment of the guarantee charge until the agreed-upon term credit duration of five years for term loans/ composite loans.
Working capital facilities are granted to borrowers throughout this time or for the time period indicated by the guarantee trust.
Pradhan Mantri MUDRA Yojana – (Launched 2015
Mudra Loan is an Indian government credit funding program that provides business loans and working capital loans of up to Rs. 10 lakhs to individuals, MSMEs, and self-employed professionals. Borrowers are not required to submit collateral or security by any financial institution.
The Mudra Yojana allows for a maximum payback duration of 5 years, with no or modest administrative fees and foreclosure charges.
Amount of loan: Up to Rs. 50,000 under the Shishu Scheme, Rs. 50,001 – Rs. 5,00,000 under the Kishor Scheme, and Rs. 5,00,001 – Rs. 10,00,000 under the Tarun Scheme. Tenure of Repayment From 1year through five years.
Stand Up India Scheme: (Launched 2016)
The Standup India initiative attempts to encourage women and scheduled castes and tribes to start businesses. The plan is supported by the Ministry of Finance's Department of Financial Services.
The Stand-Up India Scheme provides bank loans between Rs 10 lakh and Rs 1 crore to at least one SC or ST and at least one woman borrower per bank branch for the establishment of a greenfield business.
This company might be in the manufacturing, service, or trading industries. Non-individual firms shall have at least 51 percent of the ownership and controlling interest owned by either an SC/ST or a woman entrepreneur.
- Repayment: The loan is repayable in 7 years, with an 18-month maximum moratorium term.
- Purpose: The loan will be used to start a new business in the manufacturing, commerce, or service sector by an SC/ST/Women entrepreneur.
- Loan Amount: A composite loan of 75% of the project cost, including term and working capital.
The requirement that the loan cover 75 percent of the project cost does not apply if the borrower's contribution, along with any other schemes' convergence support, exceeds 25 percent of the project cost.
Loans for startups in India
Institutions | Processing Fee | Loan Amount | Repayment | Interest Rates | GST Charges |
HDFC Bank | 0.99% | BETWEEN 40-50 LAKHS | UPTO 4YEARS | 15.75% | 18% ON PROCESSING |
TATA Capital | 2.5% | 50000- 75 LAKHS | UPTO 3YEARS | 19% | 18% ON PROCESSING |
Kotak Mahindra | 2% | UPTO 75 LAKHS | UPTO 5YEARS | 17% | 18% ON PROCESSING |
Fullerton India | 6.5% | UPTO 50 LAKHS | UPTO 5YEARS | 17% - 21% | 18% ON PROCESSING |
Things to keep in mind when looking to apply for a Start-ups Business Loan
- Make a business profile that is precise and succinct.
- A well-stated loan purpose.
- A concise summary of the business unit's ambitions and aims, as well as the cash flows and predicted ROI
- Funds estimation
Eligibility Criteria for Start-ups Business Loan
The requirements for obtaining start-ups business loans differ per lender, however, the following are the general requirements:
- The applicant's age should not be less than 21 years old and should not be more than 65 years old.
- The applicant must be an Indian citizen.
- A business proposal is required of all applicants.
Dos and Don’ts
A business loan may be a terrific source of funding for your company's expansion, but it can also lead to disaster if certain components are not carefully planned.
- Properly Planning the repayment cycle
- Carefully estimated loan amount
- Avoid Debt Pile-up
- A carefully filed loan application.
Does it benefit your business
Another factor to consider when evaluating a company investment is the clarity of the predicted advantages of the fund's use.
A business loan plan must include all aspects, from how to repay the loan to how to properly use the cash, while also doing an important calculation to see if the loan is assisting the firm's goals.
Different analysts and professionals in the industry should be contacted, and an efficient strategy for whether or not to take a loan should be prepared.
Conclusion
The pace of growth of start-ups in India and the prevalent ecosystem are all coherent for the entrepreneurs. Many entrepreneurs and businesses that earlier have been unable to cope with the dynamic market conditions and business environment for lack of funds.
They can now thrive with accessibility to a variety of business loans available at their disposal. The government of India has many suitable plans and schemes that come to the aid of the new age businesses.
The government has plans that enable direct financing facilities as well as a credit guarantee so that businesses can get funds through banking channels.
Additionally, many of our traditional banking institutions and NBFCs have made curated loan schemes that can help businesses.
If your business needs loans and you can clearly define the loan objectives along with the value additions from the same, there are a variety of schemes available that you access.