Funding is vital to meet a business vision, as it is the fundamental scenario supporting the growth of a startup. Finding the best funding option might be challenging unless the business owner knows where to look for it. There are two options for small business startup loans in India: either through a government scheme or applying for a private loan.
Key government schemes include Pradhan Mantri Mudra Yojana, SIDBI Make in India Soft Loan, and MSME Loans for Startups in 59 minutes. NBFCs offer various loan options, each having its terms and conditions. Let’s look at the multiple options for start-up loans available for small business startups in India.
The Indian government assists SMEs’ growth via a variety of funding options. The top five government schemes include:
- Pradhan Mantri Mudra Yojana
The government established MUDRA (Micro Units Development and Refinance Agency) to finance micro-businesses. The scheme offers unsecured SME loans of up to ₹ 10 lakh to businesses in all types of service, trading, and manufacturing industries.
- MSME Business Loan for Start-ups In 59 Minutes
Launched in 2018, this is a small scale industrial loan scheme available to applicants with minimum six months of bank account history, GST verification, and related documents. Under this scheme, applicants may avail of a loan of ₹ 1 lakh to 5 crores with a 3% reservation for women entrepreneurs.
- Stand-Up India
Another scheme launched by SIDBI, Stand-Up India provides start up loans to female entrepreneurs and individuals in the SC or ST category. One can avail a loan of ₹ 10 lakh to ₹ 1 crore under this scheme. Any business in the trading, service, or manufacturing sector is eligible for a loan in this scheme.
- (SMILE) SIDBI Make In India Soft Loan Fund For MSMEs
The SMILE loan scheme is governed by SIDBI (Small Industries Development Bank of India) offers soft loans at a below-market business loan interest rate. Minimum ₹ 25 lakh loan amount, interest rate starting at 8.36%, moratorium period of 36 months, and repayment tenure of up to 10 years are some features of this loan.
- (CGTMSE) Credit Guarantee Fund Trust for Micro And Small Enterprises
Under this scheme, borrowers can avail of an unsecured working capital loan of up to ₹ 10 lakh and a secured loan of up to ₹ 1 crore. A new or existing business in manufacturing, service, agriculture, education industry, or self-help group may apply for a loan with this scheme.
Best Loan Options Via Private Lenders
The funds obtained through private lenders are available in the following categories:
- Equity Financing
When a business raises funds through equity financing, it contributes to the business capital and shares the risk and profit. Angel investors are high net worth individuals who may fund a venture in return for convertible debt or ownership equity. Their one-time investment helps propel a business, or they may fund it on an ongoing basis to carry the business through different stages. Venture capitalists raise large investment funds from multiple sources and finance the startup. They often invest in young companies that show great potential for success in the future.
- Debt Financing
Debt financing is a type of funding in which a business borrows money from a lender and repays it along with an interest rate. Some popular debt financing options for startups include the following:
- Term Loan: Secured or unsecured, the loan amount of a term loan depends on the borrower’s credit history and other factors. These loans have flexible repayment tenure, reasonable business loan interest rate, and easy eligibility that businesses may use to support their growth.
- Business Line of Credit: It is a flexible loan in which the borrower pays interest on only the money they borrow. Just like a credit card, they have a credit limit up to which they can draw funds according to their requirement. They have to pay interest only on the amount they spend. Such finance is excellent for easy cash flow management, big order inventory purchase, or unexpected expense coverage.
- Working Capital Loan: These short-term loans generate cash flow to cover everyday business expenses, such as purchasing inventory, paying staff salaries, and launching a marketing campaign.
- Invoice Financing: Also known as factoring, the business presents its invoice to the lender, in return for which the lender provides a loan to pay off the invoice. The lenders fix the interest rate and loan tenure in advance. Business owners often use this kind of financing when there is a time lag between their invoice and payment.
Start-up loans ease the lifecycle of a business from the very beginning. However, certain factors like collateral, repayment tenure, interest rate, and credit score play a crucial role in determining a borrower’s credibility. Small business loans offered by NBFCs are the ideal funding options for business startups in India. Compare lenders and make an intelligent choice to get the most out of it. Most importantly, maintain a responsible repayment history to improve creditworthiness and make funds readily available when needed.