For a Startup Entrepreneur, the biggest challenge is obtaining finance. And to obtain finance one of the options is bank loan.

How do you select a loan option with the least amount of liability by way of interest, securities and overheads?

In earlier times there was a certain rigidity of the financial system unwilling to take risks in financing new ventures due to limited markets and the possibility of debt. However today there is a higher degree of positivity for startups owing to the factor of the vast resources available and booming economy.

With an increasing number of Startups, banks have now various schemes for small business loans. Angel investors and private finance agencies are always on the lookout for lucrative opportunities in Startups space.

Bank loans now form the essential source of capital for startups. This article explains the systematic way for obtaining bank loan for startups in India.

Your First Plan of Action: Business Proposal

Before you apply for a business loan, you need to have clear understanding of your financial requirements. Financial Projections in your business plan can be good starting point for obtaining a business loan.

Elements of a Business Proposal for Bank Finance

  • Effective sales pitch
  • Business objectives and target audience
  • Complete structure of business model with financial analytics
  • Projection of growth: Sales figures within first year of business
  • Estimated projection of profit and loss statement
  • Estimate of returns on investments
  • Information on promoters of business
  • Potential suppliers and projected clients
  • Promotional strategies and marketing campaigns: Brief outline

Projections of the Proposal should be structured for loan requirements within the framework of major bank policies including the RBI. This provides further credibility to a business proposal. The next step is identifying potential banks that provide such loans.

Identification of Banking Institutions as Potential Financers in Relation to Your Business.

Most banks and major private financial institutions will provide you loans for small business in consideration of certain factors. These can be required capital or asset support by way of property or fixed and financial assets. In the absence of such factors, banks may also consider granting loan on basis of your structured and convincing business proposal. The repayment ability should be backed by your management and business expertise. In the presence of collateral, banks will finance up to 70% of the venture capital with an EMI duration considered up to 15 years.

It should be noted that banks are more receptive to proposals that deal in investment of equipment and machinery for production (Industrial in nature). For novel business ideas it would take a huge effort through a well compiled and good presentation of a viable business proposal.

Given the general perception of loans, banks are much better sources of business funding due to the organized and systematic methods. With fixed framework in place, you are provided an upfront picture of all your requirements and liability by way of payback.

Banking Schemes for Startup Loans

  • CGTMSE scheme: Credit Guarantee trust Fund scheme for Micro and small enterprises. A maximum amount of 1 crore can be provided without collateral to those entrepreneurs with viable and strong proposals that do not include technology related businesses.
  • SIDBI growth capital and Equity assistance: startup capital for promotion, distribution, research and development.
  • SIDBI Srijan scheme: 1 crore financial assistance to MSMEs for development and commercial growth of technology projects.

Documentation and Eligibility Required For Application of a Bank Loan

(Please note this is not a final list, this is just compilation based on the current documentation required from the Banks)

Eligibility of applicant

  • Resident of India above 21 years of age
  • Must possess a valid bank account

Id Proof (Any One)

Pan card/ voters ID card/driving license/passport/Aadhar card/

Resident Proof (Any One)

Drivers License/ electricity bill/municipality bill/ Voters Id card/Aadhar card/lease agreement or ownership deed

Business Documents Required

  • Bank statement for last 6 months
  • Business proposal with projected statement of accounts
  • Trade license
  • Fire and police license in case of food based business.
  • Detailed project report
  • Pan card/IT Returns

Collateral Documents

  • Registered Deed of property
  • Updated municipal tax payments
  • Certificates of financial assets
  • Credit track records
  • Information of existing loans
  • Sale deed

Tips to consider when planning for Bank loan for Business

  • Venture capital investors charge higher rates of interest on investment
  • Banks have easier accessibility and no equity dilution is required
  • Banks have set regulations and schemes in place for loans for small business
  • Have your complete proposal in hand before meeting a bank manager
  • Obtain all certificates and licenses prior to getting loan or provide proof of applications
  • Ensure you have paid up all existing loans
  • Make sure your location of business is not under any litigation
  • Obtain a clear title to your location or rental agreement

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