Securing a Loan for Your Startup in India: Key Strategies and Tips

Securing funding for your startup in India is important for growth, but it can be challenging for early-stage founders. With numerous options, such as traditional loans, government schemes, and newer alternatives like revenue-based funding, choosing the right one can be overwhelming.

In this guide to securing a loan for a startup in India, we will explore key strategies to help you make the right choice. We will cover both conventional loans and alternative options that are tailored to early-stage businesses. 

What is a Startup Loan?

A startup loan is a financial product designed to provide new businesses with the funding they need for growth and operations. In India, these loans are offered by banks, non-banking financial companies (NBFCs), and through government-backed programs.

Unlike traditional business loans, startup loans are meant for young businesses that may not have strong cash flow or significant assets. As a result, they often don’t require collateral and come with more flexible terms to accommodate the high-growth potential of startups.

These loans are primarily based on the business’s future prospects, financial projections, and the founder’s creditworthiness, making them accessible even to early-stage ventures.

Types of Startup Loans Available in India

• Term Loans

Term loans are one of the most traditional and common loan options for startups in India. These are loans offered by banks and financial institutions for a fixed amount, which must be repaid over a set tenure with regular monthly payments.

• Loan Amount: Typically, the loan amount is based on the financial needs of the startup.
• Repayment: Term loans come with a fixed repayment schedule, meaning you pay a certain amount every month until the loan is fully repaid.
• Interest Rate: Interest rates on term loans can be either fixed or floating, depending on the lender.

• Working Capital Loans

Working capital loans are designed to help startups manage their day-to-day operations. These loans are used to cover short-term financial needs, such as paying for raw materials, employee salaries, and other operational costs.

• Loan Amount: The loan amount is typically linked to the working capital requirements of the business.
• Repayment: These loans usually have shorter repayment terms, ranging from a few months to a year.
• Interest Rate: The interest rates can be higher than term loans because these loans are unsecured and are based on the business’s cash flow.

• Government Schemes for Startups

The Indian government offers several schemes to support startups through financial assistance, which often comes with lower interest rates and flexible terms. Some of the most popular schemes include:

• MUDRA (Micro Units Development and Refinance Agency): This scheme provides loans up to ₹10 lakh to small businesses, including startups. It is primarily focused on non-corporate small businesses and micro-enterprises.
• Stand-Up India Scheme: This scheme provides loans between ₹10 lakh and ₹1 crore to SC/ST and women entrepreneurs in the manufacturing, services, and trading sectors.
• Start-up India Scheme: This initiative aims to promote innovation and support new businesses by offering tax exemptions, funding options, and simplifying regulations.

• Venture Debt and Equity Financing

Venture debt and equity financing are options for startups that are looking to scale quickly and are open to giving up some ownership or control in exchange for capital.

• Venture Debt: Venture debt is a form of debt financing provided to startups that have already received equity funding from venture capital (VC) investors. It is often used to fund growth and bridge the gap between equity rounds. Venture debt typically has lower interest rates compared to traditional loans but may require the business to offer equity or warrants.
• Equity Financing (Angel Investors and Venture Capital): Angel investors and venture capital firms provide funding in exchange for equity ownership in your startup. While venture capital is more suitable for high-growth startups with scalable business models, angel investors tend to invest at the seed or early stages.

Alternative Financing Options for Startups in India

Startups in India are increasingly turning to alternative financing options for quicker access to capital, greater flexibility, and fewer restrictions than traditional bank loans. 

• Revenue-Based Financing (RBF)

Revenue-based financing (RBF) is a type of funding where repayments are tied to your startup’s monthly revenue. Instead of fixed monthly installments, the lender receives a percentage of your sales, which means repayments fluctuate based on how much your business earns.

Benefits:

• No Collateral: No assets are required to secure the loan.
• Flexible Repayments: Payments are based on your revenue, making it easier to manage during lean months.

• Invoice Factoring

Invoice factoring allows you to sell your unpaid invoices to a third-party company at a discount for immediate cash. The factor then collects payment directly from your customers.

Benefits:

• Improves Cash Flow: Immediate access to cash without waiting for customer payments.
• No Debt or Equity Loss: You get funds without taking on additional debt or giving up ownership.

• Equity Crowdfunding and Peer-to-Peer Lending

Equity Crowdfunding

Equity crowdfunding involves raising money by selling small equity stakes to many investors through online platforms. Investors become part-owners of your business.

Benefits:

• Wider Investor Pool: You can access capital from a large number of small investors.
• Increased Visibility: A crowdfunding campaign can boost awareness about your startup.

Peer-to-Peer Lending (P2P)

P2P lending connects startups directly with individual lenders through online platforms, offering quick access to capital at competitive rates.

Benefits:

• Lower Interest Rates: P2P loans typically have lower rates than traditional banks.
• Fast Loan Approval: The loan process is quicker, and funds are often disbursed in a matter of days.

Key Strategies to Increase Loan Approval Chances

• Choose the Right Lender

Compare banks, NBFCs, and online lenders. Banks have strict requirements, while NBFCs and online platforms may offer more flexibility for startups. Select a lender that fits your business’s needs and offers the best terms.

• Understand Eligibility for Government-Backed Startup Loans

Explore government schemes like MUDRA, Stand-Up India, and Startup India for lower interest rates and longer repayment terms. Check eligibility requirements on Startup India to increase your chances of approval.

• Provide Collateral or Personal Guarantees

Offering collateral (property or assets) or a personal guarantee can strengthen your application. This reassures lenders that they’ll recover the loan if your business fails to repay.

• Demonstrate a Strong Business Track Record

Show evidence of growth, like early sales or repeat customers. A clear business plan with financial projections and market understanding builds lender confidence and improves approval chances.

Tips for Managing Loan Repayment

• Create a Practical Repayment Plan: Set a repayment amount that aligns with your cash flow, adjusting for seasonal variations.
• Monitor Your Financial Health: Regularly track cash flow and expenses to ensure you can meet repayment obligations.
• Maintain Clear Communication with Lenders: Inform your lender promptly if you face difficulties; they may offer flexible terms or extensions.

Conclusion

Securing the right funding is crucial for startup growth, but with so many available options, it can be overwhelming to choose the best one. While traditional funding methods like loans and government schemes are commonly used, they may not always suit the needs of early-stage businesses. 

Alternative financing options, such as revenue-based financing, offer more flexibility. By exploring all available funding avenues, startups can select the most suitable option for their specific needs. For those seeking flexible, non-dilutive funding, Recur Club provides an excellent alternative with its revenue-based financing model, enabling businesses to grow without collateral or giving up equity.