Abundance of talent has never been a problem in India. Earlier the young talents of India were lured by the foreign market, the phenomenon which is popularly known to us as brain drain. But looking at the trend of past decade, entrepreneurship in India has become a sure thing. In business whether a start-up or a SME, basic need to start any business is money. Well, people do business to make money but for doing business one needs money, it’s a savage cycle. For which we have the option of business loans.
Before you decide what kind of loan to take, there are certain factors that you need to consider like time in business, your personal credit score, profits and revenue incurred from your business, collateral if any and personal guarantee. Also before going to a bank for a business loan ask yourself the following questions:
Why a loan is required?
Where will that money go? What kind of business?
How much money is needed?
Will you be able to repay it?
How much time will it take you to repay the loan?
Banks and other financial institutions before sanctioning a loan, demand a sense of trust in the applicant. You need to be thorough with your business vision, prepare a comprehensive proposal for all the whys, whats and hows. Banks take a peek in your financial and personal background. They need to make sure of your good character. Keep your paper work complete and without any loopholes, many loans get rejected because of incomplete documents. For the banks to trust you, you need to show confidence in your business idea.
Types of loans
- Working capital loans – It is for the purpose of day to day financing of a company. Working capital loans are not used to buy long term assets but are required to cover account payables, wages etc.
- Term loans – Terms loans can be short, mid-term or long term loans and can vary from a period of 3 years to a period of 10-15 years. They can be secured or unsecured. In secured loans, the collateral can be a property, business premises, land or machinery. Interest rates levied on secured loans are lower than on unsecured loans. Term loans are required for site expansion, set up of new unit etc.
- Overdrafts – It is a kind of temporary loan. In this the applicant withdraws more money from his account than what is deposited. This can be covered with the next deposit.
- Other types of funding include, Angel Investors, Venture Capitalists, Crowd Funding and Financial institutions etc.
Venture capital funds are very costly with venture capital investors expecting a 5-10 times return on their investment. So, bank loans are much beneficial to obtain.
In the past decade, a tremendous growth in the number of start-up companies is seen in India. However, without any personal guarantee or collateral, getting loan from the market is difficult. Government has launched a scheme for funding these start-ups i.e. CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises). This scheme facilitates availability of bank loan up to a sum of 1 crore without any collateral. For such loan the applicant needs to pay an additional CGTMSE guarantee i.e. 1.5% on the credit facility and CGTMSE service fee i.e. 0.75% on the guarantee amount, on the top of interest rates charged by the bank. You need to present a good business idea, a business entity, necessary registrations, clear business plan and a detailed project report.
Other schemes for start-ups are like SIDBI’s Growth Capital and Equity Assistance and SIDBI’s Revolving Fund for Technology Innovation (SRIJAN scheme) etc.
Before applying a loan build good relations with your bank. Keep your credit score between 700-800. Prepare a proper business plan. You need to be transparent with your bank in terms of your expansion ideas, employee strength, suppliers, customers, partners if any, your qualification, personal and financial background, location, business structure etc. Banks are likely to give you loan if they feel they know your business and also the amount of money you are willing to put in your idea. It reflects your conviction, therefore instills more faith between you and your bank.