Cashfree Payment Gateway : Startup Financing Tips - Business Loans for Startups

In the world of startups, the most common question entrepreneurs ponder is, "Where will the funding come from?" Apart from investors, banks in India have also shown a keen interest in the new age entrepreneurs by offering attractive business loans and various financing schemes. Let's take a look at what programmes banks have in store for startups and how you can leverage bank business loans for growth and sustainability.

Bank loans for start-ups

Today, banks are working even harder to provide monetary security by introducing special business loans that include the following

- Working Capital Loan: Designed to meet the day-to-day or short-term operational needs of a company, such as salaries, rent, inventory costs, etc. Seasonal businesses may opt for working capital loans as their business activities may be lower at other times. For example, a company manufacturing fireworks has the highest sales during Diwali, while a company manufacturing umbrellas makes the most profit in India between June and September.

- Term Loans: These loans are granted mainly to small businesses for the purchase of fixed assets in the form of cash. Fixed assets include tangible assets - laptops, machinery and equipment, furniture, vehicles - and intangible assets - goodwill, copyrights, patents, etc. Term loans are sanctioned to the borrower for a fixed amount and time. The repayment process may extend to 1-25 years.

- Medium-term loans: These are loans with a maturity of less than three years and are repaid in monthly instalments. There is also a balloon payment, whereby a portion of the total amount is paid initially and the rest is repaid in a lump sum at the end.

- Long-term loans: As the name suggests, loans are made for a period of 3-25 years. The most common form of long-term loan is bonds. Bond sales can bring in funds immediately. The only difference between medium-term and long-term loans is the time period for which the loan is approved. It also limits other financial support that the company may take on, such as other debts, dividends, etc.

- Mortgage: In this type, the borrower pledges personal property or other valuable assets as collateral to secure a loan from a lender, in this case a bank. This secured property is called collateral. Once the bank secures the collateral, it has full rights and control over it. This means that the bank can seize, liquidate or sell the collateral at any time if the borrower fails to repay the loan on time.

- Unsecured Loan: This type of loan is the opposite of a secured loan. There is no collateral or seizure involved. The bank grants the loan to the company only on the basis of its credit history. One must have very high credit to qualify for an unsecured loan. Interest rates on unsecured loans are usually higher than on mortgages because it is risky for banks to grant large loans without adequate security. Unlike a secured loan, where the bank can repossess the collateral if the company defaults, in the case of an unsecured loan default, the bank can either activate a debt collection agency to collect the debt or take the company to court.

In India, business loans are usually sanctioned for an amount between Rs. 50,000 and Rs. 75 lakhs. However, this amount may vary depending on the terms and conditions stipulated by the bank. However, it is always advisable to read the terms and conditions carefully before finalising any type.

Business Loan Approval Process

Decide: how much money do you actually need? Which bank do you want to choose? How many years will the repayment process take? And so on. In the process, you can also look at your credit history - personal and professional. Banks need clean records to build trust.

PLAN: Draft a detailed and concise business plan, as your target bank will want to know why they are investing or lending money, and for what purpose and in what amount. This plan is vital for the bank and equally important for your own clarity of thought. Sometimes we may ask for more than we actually need.

Application: Once the answers to all the above questions have been determined, proceed to collect and organise all the necessary documents. Basic documentation requirements include:

Proof of identity and address:

- identity cards

- driver's licence

- Permanent Account Card

- passport

- voter ID

Financial proof:

- Bank statements (last 6 months)

- Latest tax returns and calculated income

- Certified Public Accountant (CPA) certified/audited balance sheets and profit and loss accounts (last 2 years)

- Proof of continuous operation (establishment/sales tax certificates/tax returns)

Legal proof:

- Copy of statement of sole proprietorship or certificate of partnership agreement

- Certified true copy of the articles of association and memorandum of association

Appraisal: After submitting the application form and all the necessary documents (as mentioned above), the bank will start the appraisal and verification process. The appraisal is mainly based on the type of loan you have chosen and your creditworthiness.

RESPONSE: Depending on the results of the assessment, your application will be approved or denied.

*The entire business loan approval process can take at least 60-90 days to complete.

eligibility criteria

Who can apply or get a business loan in India?

- Self-employed professionals and non-professionals

- architects

- Certified Accountant (CA) and Company Secretary (CS)

- Entities (traders and manufacturers) - partnerships, limited liability company partnerships, private limited liability companies, limited companies.

What factors determine eligibility?

It all depends on the bank you choose as each bank has different criteria for applicants to fulfil.

Reasons for choosing a business loan instead of tapping your savings

The reasons why a business loan should be your first choice for your hard-earned savings are as follows:

- While you are paying interest on your business loan, your savings are generating a return. This cycle of income and expenses will keep your money flowing and increase your savings, thus maintaining a healthy cash flow in your startup.

- Tapping into savings when there are other options available is not a wise choice.

- Use your savings for hard times, rather than depleting them in the early stages of your business.

- Use your savings to invest in business improvements.

Benefits of Business Loans

- EASY TO ACCESS: You can start your entrepreneurial programme without worrying about the initial capital. It is easily accessible to all aspirants due to the convenient loan schemes for startups and small businesses by the Government of India and banks.

- Highly flexible: Every business idea or startup has different funding needs. Depending on your needs, you can choose the appropriate loan. Repayment terms are also flexible (depending on the financier).

- Multiple repayment options: you can choose how you want to repay your loan - monthly payments, lump sum, etc.

- Healthy cash flow and growth: cash flow and workflow are maintained in an orderly manner as funds successfully meet the operational needs of the business.

Reasons for Business Loan Denial

- Incomplete documentation: If you don't submit all the necessary documents, your loan may be denied at the appraisal stage above.

- Poor credit history: if you have a history of late repayments. A credit score is necessary to reflect your creditworthiness and your timeliness in the repayment cycle.

- Insufficient collateral: In case of a mortgage, the bank will ask for collateral in exchange. If the collateral you provide is not sufficient for the exchange, then the chances of rejection are high.

- Poor cash flow: if you can't maintain the company's (previously) good cash flow.

- Other factors: may be national political or economic imbalances or technological changes.

Business loans for women

In an era of increasing number of women entrepreneurs and aspiring women, the Government of India has introduced various loans as well as financial schemes and support for both urban and rural women. These business schemes are designed to support Indian women to stand up, straighten their backs and earn their own money. This can be done by exploring the types of loans available for women entrepreneurs.

Dream boldly and launch your business venture hassle-free! Read the PayUmoney blog to learn more about online business and marketing.