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Jasmeet Singh

Founder

The Sharp Brain

Can Startups Get Unsecured Business Loans?

“Startups are expected to grow rapidly, at a rate of between 5% and 7% per week in their initial stage – Paul Graham, co-founder of Y Combinator”

A startup goes beyond the purview of a traditional company just setting its foot on the ground. The term startup better suits to a business that is more technology oriented and has high potential to grow. And due to high growth potential, these businesses need lots of funding.

Who can start a startup?

Anyone! A startup is merely an idea of business. It starts with very little investment that is sometimes provided by government agencies. Most of the times, it is the government that pushes entrepreneurs to launch their startups. It rolls out startup programs from time to time to invite capable persons to launch their companies at a very small level sometimes individually.

Started with little money from the government, startups look for more financial help from banks and investors. They need money for buying technology; employing skilled workforce and for branding and marketing.

Startup environment in India

Definition: Indian government defines a startup as a business as a private limited company or as a partnership firm with an annual turnover not exceeding 25 crores. A business remains a startup for a period of seven years from its date of registration or until its annual turnover exceeds the startup limit that is 25 crores. For a biotechnology startup, the time period is 10 years.

In 2016-17, India witnessed 40% growth in the number of startups. With this high growth rate, India becomes one of the top five startup countries in the world. And the credit for this growth goes to creating a very healthy environment for startups.

After China and the US, India has the third highest number of startups in the world. As we discussed earlier that India saw 40% growth in startups, 30 startups of this 40% are academic incubators launched under the Indian government’s “Start-up India” initiative. Industry pioneers expect a spurt in the growth of startups in coming days.

Supportive factors

Tier-II and Tier-III cities emerged as a hub for startups. The work environment in these cities is conducive due to the local government support. Businesses like logistics and SaaS have started to crop up in the remote areas.

IT technology is a boon for startups as most startups. Computing, artificial learning, blockchain, and robotics have helped many startups to come up.

Increasing government support works as a lifeline for startups striving to thrive in the competitive market. Government is providing many facilities like bank credit facilitation scheme to support and strengthen startups. Also, the general financial rules are amended to make way for startups to supply goods to government offices.

The real situation of startups

Bootstrapping for longer: Tech startups received fewer deals in the first-half of 2017 in comparison to 2015-16. It is due to may me-too companies opened in previous years. The market for startups has become more competitive and the competition has its toll on the funds that have started drying up resulting in bootstrapping for startups for a longer time period.

Impact of GST: Implementation of GST brought new financial challenges for startups many of whom were served tax notices. They have to give tax on funding received over and above the fair market value of their startups. It is a capital investment but now treated as income hence liable for taxes.

Employee attrition: Employees working in startups are employed by large businesses that can pay higher salaries and give more benefits than startups. Many startups have become toothless due to employee attrition. Since their funds have dried up, they can’t afford skilled workforce.

In India, startups are passing through a difficult phase where they need more funding for expansion, debt restructuring and employee retention. But the good thing is that the startup system is maturing and it is expected to mature into a strong and valuable system for startups.

Funding for startups

Bootstrapping for longer could result in a shutdown but there is no certain way to come out of this situation. There are banks and equity investors that fund startup. Also, the government has special funding plans for startup businesses. The startups can also get up to 1 crore without any collateral security but with the condition that they are able to present a business model that works; the potential for growth, income, and profit.

Bank loan for startup businesses

Most startups get their funding through venture capital firms and angel investors and they miss the funds provided by banks that have special schemes to help startup companies. Banks are the biggest investors for startups. The give loans under different categories to run and expand a startup.

Banks provide financial assistance to startup companies through all stages of development. The entrepreneurs can request an asset-backed loan or working capital depending on their needs.

Here’s what banks have to offer to startups

Startups can get a bank loan for novel areas only with higher collateral security coverage or backup income sources

The bank loan is available for research and development technology. But it would be an asset-backed loan

Banks give term loan for the purchase of equipment or machinery for use in business. It is also a secured loan

The Working capital loan is for stocking inventory. Banks give this loan to startups after assessing their working capital requirement

The Credit Guarantee Fund Trust Scheme for Micro, Small and Medium Enterprises allows banks to give an unsecured business loan for startup in India of up to 1 crore to startup companies. But this loan isn’t for marketing or inventing technology. Businesses looking for unsecured working capital or term loan can take advantage of CGTMSE Scheme.

Advantages of a bank loan

  • Banks charge a fixed interest rate
  • They are easier to approach and deal with
  • Banks have an established framework that makes getting loan easier
  • The profit/loss of the startups belong to their owners

How to approach a bank for a loan?

You first need making a pitch for your case for a bank loan. Write a detailed application describing your business model, revenue model, expected sales and estimated profit along with promoter’s background to present to a bank. It is called detailed project report. Once the report is ready, you need locating potential banks that can accept your loan request.