Startup Loan for New Business

Nov 27, 2018 5:00 IST 28058 views

If you are running a startup, your big challenge must really be meeting operating costs and balancing them with the need to expand. Let us admit; it is not that easy. You are hungry for funds but not too many financial institutions are willing to take that risk. If you think that it is still too early to get equity participation or if you are cagey about VC funding, then there is the option of a startup loan. Like other traditional loans, this startup loan allows a new company to borrow from conventional lenders.

As an entrepreneur, you need to learn early on that good and solid documentation lies at the core of accessing funding options. After all, start up business loans are specifically for funding startups that have little or no credit history. Here is a cheat sheet for your approach:

  • Have a detailed and crisp business plan
  • Outline the goals and the objectives of the business including a chart that will indicate the growth of the venture along with the potential returns
  • Give a clear estimation of the funds as close as possible
  • Specify the use of the startup loan in the business plan

Features of Startup Loan:

  • Most financial organizations offer this loan online or as a 1-minute application loan or directly through their branches. Some of the lenders even offer the comfort of doorstep service
  • Startup loan requires minimal documentation
  • Prospective entrepreneurs need to prove their personal credit history
  • Generally, financial institutions do not ask for any kind of security or collateral for business startup loans
  • Competitive interest rates but it solely depends upon the individual’s credit history
  • Ease of repayment and flexible tenure
  • Financial institutions offer added benefits of sms, web chat, and other services

Eligibility Requirements for Startup Loan:

  • The applicant should be 21 to 65 years of age
  • ID proof of the individual like PAN card or Aadhaar card
  • Proof of address like Driving license, Aadhaar card
  • PAN card for company or firm
  • Last six months bank statement
  • Certified originals Memorandum and Articles of Association

The two types of popular start up business loans are the Line of Credit and Equipment Financing.

Line of Credit:

A line of credit is more like a credit card where the card applies for the business rather than the individual’s personal credit. The advantage of this loan is that the borrower need not pay interest on the borrowed amount for the first nine to 15 months, which makes it easier for the startups to tackle the preliminary expenses of starting the business. Similar to a credit card, the borrower needs to pay the interest for the amount used.

Equipment Financing:

In this type of loan, the equipment is pledged as collateral, that enables the financial institution to charge a lower interest but with a relatively higher risk. The borrower should repay the amount used to purchase the equipment as they earn revenue from their business. The advantage of the equipment financing is that the borrower can claim tax benefit for the depreciation of the equipment.

Both these types of loans need a high credit score and the required documents as stipulated by the financial organization for sanction of the loan.

Like every other loan, a startup loan for new business also has its own share of advantages and disadvantages:

Pros:

  • Even though financial institutions review the business plan and its minute details, they have no control over the business operations or nor can direct the borrowers in the use of funds
  • The financial institution cannot claim the profits of the business
  • The loan approval process is fast. Therefore the funds are immediately available
  • Borrowers can claim tax benefits on the interest paid towards the loan
  • It helps in building the credit rating of the business

Cons:

  • Financial organizations impose stringent conditions on granting the loan
  • The borrower needs to furnish the financial organization with the exact details of their business plan, business operations, information of investors and potential investors, the cost involved and the profit expectation
  • Financial organizations typically prefer businesses that are already operational

However, they offer loans to entrepreneurs who have no or less credit history, provided they have a high credit score and can guarantee repayments on time.

Conclusion:

Obtaining a startup loan for a new business is a straightforward and easy process and like every other product. An individual applying for a startup loan should be aware of their requirements and their financial position as they have to pay back the loan along with the other expenses incurred from the business’ day to day activities.

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