Business Loan

Government of India Loan Schemes for Start-Ups

06 Dec 2019 5 min read
Business Loan: Know What Loan Schemes Govt. Has Introduced for Startups - Afinoz

Let’s put up interesting data.

As per KPMG report, the number of start-ups accelerated to 50,000 in 2018 from 7000 in 2008. 7.14X jump. Isn’t this sound fascinating? Artificial Intelligence, Fin-tech, food tech, health tech, and agri-tech – there is an innovation in almost each and every sector. The passion of start-up is not confined only to Tier 1 Cities; it has reached across the nook and corner of Tier 2 and Tier 3 cities. Raising a venture Capital is hitting the headlines daily. Across the country, small start-up is busy in making presentations for raising Venture Capital (VC) Funding and applying for Line of Credit, Business Loan etc. to fund their business activities. 

In a significant relief to them, the Government of India announced the Start-up Campaign in 2015 with Rs 10,000 crore start-up funding pool. This is a constructive step towards promoting entrepreneurship in the country. There are huge numbers of start-ups currently existing in India and to cater to their requirements, the Government of India has devised various schemes of business loans for start-ups. One such notable example is of SIDBI. Small Industries Development Bank of India (SIDBI) also offers fund to start-ups and MSMEs directly instead of channelizing through banks.  Government subsidy loan for business is offered at lower interest rates than that from private banks by almost 300 basis points. Some of the most popular schemes offered by Government of India for start-ups and MSMEs include:

  • Stand-up India – This is a constructive initiative to encourage entrepreneurship among SC, ST, and women communities. They can avail loans ranging from Rs 10 lakh to Rs 1 crore under this scheme.  

  • Pradhan Mantri Mudra Yojana – Under this scheme, working capital and term loan are available for all kinds of manufacturing, trading, and service sector including allied agricultural activities. The scheme was launched in 2015, for offering loans under various categories, namely- Shishu, Kishore, and Tarun in amounts ranging from Rs 50,000 and Rs 10 lakh. 

  • Bank Credit Facilitation Scheme –National Small Industries Corporation (NSIC) eyes to meet the requirements of MSME units in an easy way. Usually, the loan is offered for a tenure ranging from 5-7 years, but in special, cases it can also be extended till 11 years. Credit facilitation is offered through many banks, some of which are mentioned below -

  • IndusInd Bank
  • Vijaya Bank
  • Yes Bank
  • Federal Bank
  • Kotak Mahindra Bank
  • HDFC Bank
  • Corporation Bank
  • AU Small Finance Bank
  • Bank of Baroda
  • Sustainable Finance Scheme – Here, the funding is available for the businesses working in green energy, renewable energy, technology hardware, and non-renewable energy segments. Headed by SIDBI, this scheme intends to provide support to the value chain of cleaner production/energy efficiency, and sustainable development project.  

  • Credit Guarantee Scheme (CGS) – These are suitable for both kinds of businesses - those who are in the initial phases, and also those who require funds to expand their businesses. It includes service and manufacturing sector industries; however educational, institutional, agriculture, and retail trade are excluded from applying for this scheme. Under this scheme, a business loan of up to Rs 2 crore can be raised.

  • Coir Udyami Yojana – The primary aim of this scheme is to set up coir units across India. This Coir Board heads this scheme, and the fund's project costs up to Rs 10 Lakh. The rate of interest will be at par with the base rate. The total lending fund should not exceed 25% of the total cost of the project. 

  • National Bank for Agriculture and Rural Development (NABARD)- NABARD  is focussed on providing refinance to lending institutions in rural areas. The bank aims to provide and regulate other facilities that help to promote and develop agriculture, cottage, small industries, handicrafts, and village industries. 

What are the differences between applying at a public sector and a private sector bank?

Applying for a business loan at a private bank is different from applying at a government bank. The difference lies in interest rates, processing fees, processing time, and repayment policies. One has to consider the following points before making out a decision -

  1. Processing Fee: 

Private Banks in most of the cases, channelize their customers via Direct Selling Agents (DSA’s). These agents charge fees to source the customers, which the banks ultimately charge from the customers in one form or another. The Public Sector Banks charge comparatively lower interest rates as their sourcing of customers have a direct approach.

  1. Processing Time:

If in case you need the funds urgently, go for a private bank. They disburse loans faster, to meet their targets and deadlines.

  1. Efficiency:

Private sector banks score better than that of public sector banks in terms of service and efficiency. In public banks, the effort is much more from a borrower’s side. 

  1. Prepayment: 

A public bank gives an applicant the flexibility to pre-pay as per his/her wish. However, in case of a private bank, an applicant can start pre-payment only after 6 months from the date of disbursement.

What do you look for when you apply for a business loan?

  1. The costs involved – The first and foremost point to consider before applying for the business loan is to understand the costs involved in applying for the same. Reading all the enclosed documents carefully will give a clear picture of all the costs to be paid to the bank. 

  2. The actual money required as loan amount – It will be a good idea to avail the loan amount only for the exact purpose and plan. Borrowing the funds as much as possible will escalate the fees and interest rates of the loan amount. There should be a proper plan in place for the utilization of funds and its repayment.

  3. Improving the credit score – The credit score of the applicant highly influences interest rates of business loans. It is highly recommended to update your credit score by repaying all the previous dues. Credit ratings of both the business and the proprietor are taken into consideration before approving the loan amount.

  4. Line of Credit – For businesses that are smaller or medium-sized, and if their requirement is for a short term; a line of credit seems to be a viable option. This is more beneficial where the maximum limit for borrowing is set, and the interest is only payable for the actual amount used.  

What are the major types of Start-up Business Loan?

  1. Line of Credit: The best feature of this loan is that the borrower need not pay the interest on the borrowed amount for the first nine to 15 months. It gives relaxation to the entrepreneurs who struggle in the initial phases of establishing the business. Line of credit is more like a credit where the card applies for the business rather than the individual’s personal credit. It is in similar lines with Credit Card, where the borrower is required to pay the interest for the amount used. 
  2. Equipment Financing: This kind of loan demands to put up the collateral as security. This enables a lender to charge at lower interest rates but with a relatively high risk. The advantage of this loan is that the borrower is eligible to claim the tax benefit for the depreciation of the equipment. Both these types of loan need a high credit score. 
  3. Instalment Loans: This means borrowing a lump sum amount all at once. A start-up business needs to have the following things to avail an instalment loan:

  • Collateral
  • Good credit score
  • Business plan
  • Additional guarantees

The loan is repaid in the form of both principal and interest amount. The interest amount is calculated from the day when the contract is signed and it remains till the closure of the loan. 

In addition to these, other types of business loan include term loans, accounts receivable loan, commercial loans, to name a few.  

Summary 

Analyzing a few factors before applying for the business loan will help one decide what works best for them. Like - Line of Credit is the option when the borrower needs flexibility in terms of the repayment schedule. Like any other financial product, obtaining a business loan is easy. But you need to make a comparative study to figure out which financing option will work best for you.