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Startup Business Loans: How To Give Your Fledgling Business A Real Shape
Read all about startup business loans to understand how this form of an unsecured business loan can help your business reach new heights
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The past decade has witnessed exponential growth in the Indian startup ecosystem. Opportunities for entrepreneurs and companies to open up in this space have grown manifold, and the contribution of startups to India’s Gross Domestic Product (GDP) has been projected to be 4 - 5 per cent over the next 3-5 years. This boom in business has come about through government support and assistance.
The Indian startup scenario has been lucky enough to have been offered support by way of various government schemes, and programs of late. Startup incubators are also the order of the day as the business has been witnessing growth. This dual combination of business growth and government support has encouraged young Indian startups to scale, sustain and expand.
However, as with any business, the road to fruition is also laden with hassles. This is true in the startup scenario too. While the presence of new, upcoming startups is a good sign for the Indian economy, this also means that every company will have to strive harder to make itself known, recognized, and profitable. Creating this unique differentiation requires significant time, energy, and, most importantly, resources. Financing the business needs of a budding startup can be challenging, especially when the founders do not have significant capital to invest in their company.
Here’s where the popular and easy-to-avail startup business loans come into the picture. What exactly are startup business loans, and how do they aid new business owners?
As with any other business loan, startup loans are also subject to specific eligibility criteria. It is helpful to understand these clearly to give business plans a real shape. If you are startup entrepreneur, here are a few pointers on eligibility criteria that are useful to know:
- Credit Line: Your business’ credit history will be of utmost importance to the bank while assessing the loan amount. Ensure you maintain and showcase an excellent credit score throughout your operational tenure.
- Business Duration: A company that has been functional for over a year has more accessibility to a startup loan than an almost-new business. The duration helps the bank garner sufficient information on the company’s financial, human, and logistical operations.
- Financials: The lender needs to see performance and potential growth in your business operations. Your company's revenue figures and operating profit (if any) will positively influence the lender’s decision to extend the startup loan.
- Ability to Repay: Both secured and unsecured business loans are available to startups. While unsecured business loans do not require collateral, lenders who give out secured loans check for the business’s ability to repay the loan as a decisive eligibility factor.
Types of Startup Business Loans
- Term Loans: These are the most common types of startup business loans available. Here, the loan amount is typically a large, upfront one. The period for which this loan is given is also long, typically up to 10 years. A term loan is a financial instrument that sustains and supports a startup over its initial induction, growth, and maturity phase. Financial institutions offer such loans at attractive interest rates to make them more attractive. This is a good time for startup business owners to avail of and benefit from such loans.
- Working Capital Loans: While term loans look into the long-term funding requirements of the business, working capital loans make the business's daily operations easier. Some startups require significant working capital throughout the year, while others require high amounts during certain business cycles. These specific business requirements can be funded by taking a short-term, working capital loan. As these are short-term loans, they are often offered without collateral by the lender.
- Line of Credit: Startups have another unique tool to fund their financial requirements: the business line of credit. This is a revolving credit facility where businesses are allowed to borrow up to a specific limit and pay interest only on the portion of the amount borrowed. Usually, the business's financial assets are pledged as collateral for such loans. It differs from a regular loan as the business must pay interest only on the amount borrowed, not the entire amount sanctioned.
There is also greater flexibility in repayment as you can repay the amount based on your business’s cash flow at that time. However, remember that the loan must be paid before the due date.
Since a line of credit is a lucrative loan option, lenders tend to scrutinize and evaluate startups heavily before sanctioning such loans. A business’ cash flow statements, financial revenue statements, asset valuation, operating profit, scalability, and growth projections are carefully considered before giving a line of a credit-based loan facility.
- Equipment Financing: Many startup expenses are related to infrastructural and logistical elements of bringing the business idea to life. As these companies enter the market, they invest heavily in purchasing prime office space, decoration and development of the office, purchasing equipment, and hiring personnel. While these are one-time, high-value expenses, they prove to be a drain on the owner’s finances. An equipment financing loan can aid in tiding through such expenses and maintaining reasonable financial health.
Benefits of Startup Loans: Some crucial elements differentiate a startup loan from other regular business loans. Startup loans have greater flexibility regarding the availability of loan amounts, repayment tenure, and other terms and conditions. For a business that is still in its nascent stages, this flexibility helps make the right choice. Further, the interest rates offered for a startup business loan are much more attractive than regular loans. Lenders are increasingly investing in the long-term growth potential of a successful startup.
Indian startups that have been doing well in the past have made lenders hopeful of a positive return by investing in new startups. Another advantage of a startup loan is its contribution to building a solid credit history for the company. While it is difficult for a startup to procure a large business loan for the lack of credit history, they can easily avail a startup loan.
By repaying the startup loan on time, they can build a good credit score and reputation, enabling them to avail of more significant, bigger loans in the future.
To summarise, startup business loans offer unique advantages to startups to build, establish and scale their business presence. However, it is essential to note that your business’ handling and repayment of this loan will set a precedent of how financially responsible your business will be. It sends out a message to other lenders about the soundness of your business. Before you go to a lender with a loan application, getting assistance from effective online tools such as business loan calculator would be helpful. These calculators help you understand the loan costs you will incur and the benefits that will accrue to your business.
As every startup’s needs and requirements differ, no loan type can suit all businesses. Before going in for a startup business loan, read, research, and understand all tenets and clauses of such a loan.