Guide on How to Get a Startup Business Loan

Launching a startup is an exciting venture, but one of the biggest hurdles entrepreneurs face is securing the necessary funding. How hard is it to get a startup business loan? In India, the process can indeed be challenging, given the stringent requirements and high standards set by financial institutions. A report by EY highlights that the MSME sector in India falls behind global averages in terms of formal credit penetration.

However, with the right approach and preparation, you can navigate this financial landscape successfully. 

Partnering with Recur Club can ease this journey by receiving expert guidance and access to a wide network of lenders. 

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1. Determine How Much Funding You Need

Determining the exact amount of funding your startup requires is the foundational step in the loan application process. This critical assessment not only helps you identify your financial needs but also prepares you to present a robust case to potential lenders. Here’s a guide to assessing your funding requirements:

• Assess Initial Costs and Operating Expenses: List all initial costs associated with your business. These include equipment and supplies, office space or retail location expenses, inventory, marketing and advertising costs, and professional fees such as legal, accounting, and consultancy charges. Also, calculate your operating expenses. This includes salaries and wages for your employees, utilities and rent for your office or retail space, continued marketing and sales efforts, and miscellaneous expenses.

• Contingency Fund: Include a contingency fund in your loan request. This fund acts as a buffer for unexpected expenses or downturns in revenue. Typically, setting aside 10-20% of your total estimated costs as contingency can safeguard your business against unforeseen challenges.
• Financial Forecast: A detailed financial forecast is essential to express your business’s future revenue and expenses. This includes sales projections based on market research and industry trends, expense projections covering both fixed and variable costs, and profit and loss statements showing potential profitability over time. These forecasts not only guide your funding requirements but also demonstrate to lenders that you have a clear plan for financial sustainability.

Overestimating your funding needs can lead to unnecessary debt and higher interest payments. Lenders may view excessive loan requests as a red flag, indicating poor financial planning. It is crucial to be realistic about your needs and ensure that your loan amount is justifiable and well-calculated.

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2. Determine the Type of Loan You Require

Choosing the right type of loan for your startup is crucial. In India, you have various loan options that cater to different business needs and stages of growth. Understanding these options and selecting the one that best suits your startup can significantly impact your business’s financial health and sustainability. Here are some types of loans available for Indian startups:

• Term Loans: Term loans are one of the most common financing options for startups. You can get a specific amount and repay it over a set period with fixed or variable interest rates. The loan amount varies, depending on the lender and your business's creditworthiness. Term loans are ideal for significant, long-term investments like purchasing equipment, expanding operations, or other capital expenditures.
• Business Lines of Credit: A business line of credit offers you flexible, revolving credit up to a certain limit. Unlike a term loan, you only pay interest on the amount you draw. This option is suitable for managing short-term working capital needs, such as covering payroll, inventory purchases, or other operational expenses. The flexibility of drawing and repaying funds as needed makes it an attractive option for many startups.
• Working Capital Loans: Working capital loans are designed to finance your everyday operations. These loans help you manage short-term liquidity needs and are usually of shorter duration, ranging from a few months to a year. You can use them to cover expenses such as rent, utilities, payroll, and other immediate operational costs. Working capital loans can be unsecured or secured by collateral. 
• Equipment Financing: Equipment financing is specifically used to purchase business-related equipment. Equipment finance offered by banks and NBFCs is mostly collateral-free, and startups availing equipment loans also enjoy tax benefits. This type of financing is beneficial if your startup is in manufacturing, healthcare, or other industries requiring significant equipment investments.
• Microloans: Microloans are loans that are below Rs. 1 lakh and are often provided by microfinance institutions. These loans are ideal if your startup needs smaller amounts of capital and you have difficulty securing traditional bank loans. Microloans often have simpler application processes and quicker disbursements but may come with higher interest rates.

By carefully evaluating your needs and the available loan types, you can secure the necessary funding to propel your startup toward success in the dynamic Indian market. 

Also Read: Top 5 Benefits of Collateral-Free Business Loans for Indian Startups

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3. Check Your Eligibility

Before you apply for a startup business loan in India, you need to ensure that you meet the eligibility criteria set by lenders. These criteria vary across different financial institutions, but understanding them will help you prepare your application and increase your chances of approval. 

• Personal Credit Score: Your credit score is a critical factor that lenders consider. It reflects your creditworthiness based on your credit history. A high credit score issued by CIBIL indicates that you have been responsible with credit in the past, making you a lower-risk borrower. To improve your chances, aim for a credit score above 700. 
• Business Credit Rank: If your startup has been operational for some time, lenders will also look at your business credit rank. This rank evaluates the creditworthiness of your business based on its financial history. Ensure that your business credit report is accurate and up-to-date. You can improve your business credit rank by maintaining a good payment history with suppliers and managing your business finances responsibly. You can check your company credit rank and company credit report on CIBIL website.
• Personal Guarantee: Many lenders may require a personal guarantee when issuing loans to startups. This means you guarantee repayment of the loan, making you liable to pay off the debt if your business fails to repay. 

There are two types of personal guarantees: 

1. Limited guarantee: Here, if the business defaults, the guarantor will pay only for the portion of the loans. This usually happens when there are two or more promoters or directors who have signed as a personal guarantor. So, the debt is split among them, and each will pay their liability.
2. Unlimited guarantee: Here, the guarantor takes full responsibility for the loan, i.e., he/she will pay off the debt if the company fails to repay the loan.

• Time in Business: Lenders often prefer businesses that have been operational for at least a year. If your startup is newer, you might need to demonstrate strong potential through a detailed business plan, financial projections, and market research. Highlight any milestones or achievements that showcase your business’s growth and stability.
• Annual Revenue: Your startup’s annual revenue plays a significant role in loan eligibility. Lenders want to ensure that your business generates enough income to cover loan repayments. Prepare detailed financial statements, including profit and loss statements, balance sheets, and cash flow statements, to prove your business’s financial health. Consistent revenue growth can significantly bolster your application.
• Debt Obligations: Lenders will assess your existing debt obligations to determine your ability to take on additional debt. High levels of existing debt might make lenders hesitant to approve a new loan. You should aim to reduce your debt-to-income ratio by paying down existing loans and avoiding new debt before applying for a startup loan.

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4. Compare Lenders

Comparing lenders is a vital step in securing the best startup business loan in India. Careful evaluation of interest rates, loan terms, loan amounts, application processes, fees, lender reputation, and specialized loan programs will help you make a well-informed decision. Here’s how you can effectively compare lenders to secure the best possible loan for your startup:

• Interest Rates: Interest rates are among the most critical factors to consider. Lower interest rates can significantly reduce your overall repayment amount. Look at the loan terms, which include the repayment period. The final interest rate depends on various factors, including the duration of the loan, the principal amount of the loan, and credit score. Compare the interest rates offered by different lenders and choose the one that offers the lowest interest rate. 
• Loan Amounts: Different lenders offer varying loan amounts. Ensure that the lender you choose can provide the amount you need. Some banks and financial institutions have a maximum loan limit, while others might offer flexible financing solutions tailored to your needs. Align the loan amount with your financial requirements to avoid borrowing more or less than necessary.
• Application Process and Funding Times: The application process can vary significantly among lenders. Some might offer a streamlined online application process with quick approvals, while others might require extensive documentation and in-person meetings. Consider how quickly you need the funds. If time is of the essence, prioritize lenders known for their swift processing and disbursal times.
• Charges: Be aware of any additional fees that may apply. These can include processing fees, prepayment penalties, late payment fees, and service charges. Understanding these costs upfront can prevent unpleasant surprises later. Compare the fee structures of different lenders to find the most cost-effective option.
• Lender Reputation and Customer Service: The reputation of the lender and the quality of customer service they provide are also important. Look for reviews and testimonials from other entrepreneurs who have worked with the lender. A lender with a good reputation and excellent customer service can offer a smoother and more supportive borrowing experience.
• Government-Backed Loans and Schemes: Consider lenders that participate in government-backed loan schemes. These schemes, like the Pradhan Mantri Mudra Yojana (PMMY) and Stand-Up India, provide loans at attractive interest rates and often with relaxed eligibility criteria. For instance, under PMMY, you can avail of loans up to ₹10 lakh, while Stand-Up India supports women and SC/ST entrepreneurs with loans ranging from ₹10 lakh to ₹1 crore..

Recur Club, with its extensive network of lenders including Tata Capital, HSBC, Aditya Birla Capital, and more, provides a platform where you can compare multiple capital offers, allowing you to secure the most favorable terms for your business needs.

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5. Gather Documents and Apply

Once you have selected the right lender and loan type for your startup, the next crucial step is to gather all the necessary documents and submit your loan application. Here's what you need to prepare:

• Personal and Business Identification: Ensure you have valid personal identification like your Aadhaar card and PAN card. For your business, gather all registration documents, including your GST registration, to establish the legal standing of your enterprise.
• Financial Statements and Records: Prepare detailed financial statements, including balance sheets, income statements, and cash flow statements for the past few years. These documents provide lenders with insight into your business’s financial health and trajectory.
• Business Plan and Loan Proposal: A comprehensive business plan is essential. This should include an overview of your business, market analysis, competitive analysis, sales strategies, and financial projections. A detailed loan proposal should outline how you intend to use the borrowed funds and the expected impact on your business.
• Bank Statements: Provide bank statements for the last 6-24 months to demonstrate your business’s financial activity and cash flow management.
• Tax Returns: Both personal and business tax returns may be required for the past two to three years to further verify your financial history and credibility.
• Collateral Documentation: If you are applying for a secured loan, documents related to the collateral you are offering will need to be prepared, including property deeds or proof of ownership of other assets.
• Legal Documents: Depending on the structure and nature of your business, you may need to provide additional legal documents such as franchise agreements, commercial leases, or contracts with significant clients.

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6. Final Application and Approval Process

Once you have gathered all the necessary documents, the final step is to submit your loan application. This process generally involves a few key stages:

• Submission of Application: Start by submitting a comprehensive loan application package to your chosen lender. This package should include all required documents, such as personal and business identification, financial statements, business plans, tax returns, and any collateral documentation, if applicable.
• Loan Review: After submission, your application will enter the review stage, where loan officers and financial analysts will scrutinize the details of your application. This review typically focuses on assessing the risk associated with lending to your business and verifying the authenticity and accuracy of the documents provided.
• Credit Evaluation: Lenders perform a detailed credit evaluation, which includes reviewing your credit history, credit scores, and any other data related to your financial behavior. This step is crucial as it helps lenders determine the creditworthiness of your business and the terms of the loan.
• Collateral Appraisal: If you are applying for a secured loan, the lender will assess the value of the collateral you are offering. This appraisal ensures that the collateral sufficiently covers the loan amount in case of default.
• Approval Process: If your application meets all the lender's criteria, it has a better chance of moving forward to the approval stage. During this phase, the lender may ask for additional information or clarification on certain points before making a final decision.
• Loan Offer and Negotiation: Once approved, you will receive a loan offer, which includes the amount of money, interest rate, repayment terms, and other conditions associated with the loan. This stage may also involve some negotiation on the terms of the loan to better suit your needs.
• Acceptance and Disbursement: If you accept the loan offer, the final agreements are drafted for your signature. After signing the loan agreement, the loan amount is disbursed into your designated business account, typically according to the milestones or schedules outlined in the agreement.
• Ongoing Compliance and Repayment: After receiving the funds, you are responsible for complying with all the terms of the loan agreement, including regular repayments and any specific covenants related to the loan. Proper management of these obligations is critical to maintaining good financial standing and eligibility for future financing.

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Conclusion

Successfully securing a startup business loan marks a pivotal moment in any entrepreneur's journey. Through careful planning and understanding your financial requirements, you can get a startup business loan and have a solid foundation for your business's future. 

Partnering with Recur Club enhances this process by providing expert guidance, a broad network of lenders, and tailored financing solutions that meet your unique business needs. Embrace this opportunity to fuel your startup's growth and transform your ambitious visions into tangible successes.

Take the first step towards financial empowerment for your startup by trusting Recur Club!