Startup Business: How to Raise Capital
One of the main and hardest challenges an Entrepreneur finds when venturing on a new business is raising capital. Although one may come across a panoply of funding possibilities, firstly the Entrepreneur must comprehend the pros and cons of each of the funding options available as well as assess the funds required for the startup, how funds the funds will be applied, projected financial position of the business without omitting the revenues produced and advanced strategy – to approach and attain the essential capital. Due to enjoying abundantly of coverage, venture capital firms and angel investors are boundless sources of funding. However, otherwise most Entrepreneurs are aware of, Banks and Financial Institutions can also provide funds for a startup business. These institutions are responsible for founding thousands of startups every year. In India, Banks are one the prime funders of startups. The present article focus on the different types of funding that banks offer to Entrepreneurs (for example, a loan) and discusses other questions regarding banks loans for startups in India.
Do banks grant loans to a startup business?
Yes. Banks and Financial Institutions grant financial support to companies, even to those who have been founded recently. A startup business can benefit from a host of term loan, working capital or, depending on the necessities, it can take advantage of backed loans. If a Bank is pleased with the business model developed, the estimated returns, the capacity the business has to reimbursement the loan (may it be throughout the start up business loans or any other mean), the managing knowledge and proficiency, along with another security factors presented by the startup, it will advance the funds.
Do banks grant loans for startups in innovative areas?
Since innovative businesses may prove risky – the business model has yet to be structured -, Banks will usually demand greater insurance safety coverage, most commonly with a back-up source of revenue – or any other source the Entrepreneur might have at the disposal. If a different revenue source can be delivered, then, the Bank will loan funding to startups on innovative areas.
Can I acquire a bank loan for investigation and development of technology as a startup?
Yes. A startup is very likely to attain a bank loan for investigation and development of technology. Asset backed loans, which are usually grounded on the current market value of the assured property (may it be a household, a commercial establishment or an industrial building) can be used for generating novel technology or advertising other business expansions. In most cases, Banks loan up to seventy per cent (70%) of the market value of the property, after its assessment, with a loan term of seven (7) to fifteen (15) years. Furthermore, besides granting a secondary protection, the Entrepreneurs must present to the Bank the business’s estimated monetary earnings and funding sources in order to meet on time the loan’s interest and standard obligation.
Can I acquire a bank loan for buying equipment or machinery as a startup?
Yes. A startup can attain a Bank term loan in order to acquire equipment or machinery. Usually, Banks encourage the extension of loans for acquisition and manufacture as well as commissions on capital assets, such as machinery or equipment to be used in the business.
Can I get a bank loan for stocking inventory as a startup?
Yes. A startup can acquire working capital loan from banks for stocking inventory or providing credit to clients. Banks will attempt to evaluate the working capital requirement of the business grounded on the predictions supplied and then they will follow a traditional method to advance working capital funds.
Can a startup business acquire a bank loan without collateral security?
The Credit Guarantee Fund Trust Scheme for Micro, Small and Medium Enterprises offers an outline for the Banks to lengthen up to Rs.1 crore of credit without collateral security towards a term loan and working capital necessities of the startup. This loan is not for advertising or technology development). Consequently, start up business loans which need capital resources or inventory can apply to the CGTMSE scheme to obtain collateral fee loans from the bank. Loans under CGTMSE schemes are only offered by the banks to selected Entrepreneurs who have showed outstanding economic and administrative insight. As a consequence, only a small number of startups meet the requirements to obtain funds from banks which are under the CGTMSE scheme in order to begin their business operations.
Are there any specific loans or schemes for startups?
Yes. Numerous banks and financial institutions have loans or schemes which are meant to be for startups. For example, SIDBI created “Growth Capital & Equity Assistance” for SMEs that need capital in order to develop. These funds can be used for marketing, for building a trademark, to create a system of delivery, to technical know-how, R&D and software buying.
SIDBI also created “Revolving Fund for Technology Innovation” (SRIJAN Scheme), which offers monetary support to MSMEs based on projects towards growth and up scaling as well as demonstration and commercialization of ground-breaking technology. The support is offered in the form of an early stage “debt” funding on laxer terms for development, demonstration and commercialization of groundbreaking equipment in developing technological areas as well as untested equipment, novel goods, process, etc., which have not been effectively sold in the market yet. The maximum support is generally not more than Rs. 1 crore per project. The interest rate is established by the Project Approval Committee (PAC) and it is not more than 5% p.a..
How should a startup request a bank for funding?
Before approaching a banker or an investor with a funding application, firstly, the Entrepreneur responsible for the business must organize and prepare a pitch. The pitch must describe the business and the revenue model, estimated sales and profit as well as the estimated growth rate and returns. The return of an investment is a crucial feature for both banks and investors. Hence, it is imperative for the Entrepreneur to first collect and compile the information in a respectable arrangement (just liked a Detailed Project Report) as well as familiarize himself/herself with it.
After the investment pitch is organized, the Entrepreneurs must search for potential banks which offer arrangements or provide facilities to startups applying for funds. It is vital for the Entrepreneurs to organize their request following the outline requested by RBI’s and the Bank Loaning Policy (i.e. not demanding funds for marketing at an organization that offers merely term loans). After these two steps are completed, the Entrepreneurs may schedule a meeting with the banker, bring forwards the pitch and apply for funding.
What are the benefits of acquiring a bank loan for a startup business?
There are several benefits of acquiring start up business loans. Many of these benefits can’t be attained if the Entrepreneur obtains the funding from a venture capital or angel investor.
1) Venture capital funds are inflated. Venture capitalist stakeholders expect five to ten times the profit on their initial investment. Nevertheless, bank loans do not entail equity reduction and Bank’s return rate is fixed at the minimal amount of about 13 to 17%.
2) Banks are more approachable. Since Banks are accessible all throughout India, it is far easier to talk with your local banker and hand over your request for funds than having a meeting with a venture capitalist or angel investor.
3) Conventional outline for funding assessment. Commonly, Banks have planned outlines for dealing with funding applications. Consequently, a response to the application for funding will be treated faster than in comparison to a venture capitalist or angel investor.
4) You have total control of the revenues and losses of the start up business loans.