Startup Business Loans – Government Schemes, Features, Benefits

January 10, 2022

Wondering if a startup business loan will be good for your new company?

There is no doubt that the economic landscape rapidly evolves and transforms with the advent of multiple startups. As per Hurun Research Institute, India is the third-largest country with the maximum number of startups in 2021. The country not only has 38,815 startups but 82 unicorns with gross funding of $38.4 billion.

Taking complete responsibility to fuel this further and encourage more individuals to become self-sufficient entrepreneurs, the Indian Government has devised multiple startup business loan schemes that you, as a startup or an MSME, can easily avail of when needed.

Let’s get to know about all the start up business loans provided by the Indian Government, along with its features and benefits in this article.

Startup Business Loans Provided by the Indian Government

The Government of India took the initiative to make formal funding available for startups and micro, small and medium enterprises (MSMEs). With the launch of startup loans for new businesses, startups and MSMEs can opt for funding that suits their requirements.

Additionally, the Small Industries Bank of India (SIDBI) has started providing funds to businesses directly instead of channeling it through various financial institutions. There are several schemes under which startup business loans can be availed.

Loans under these schemes offer low-interest rates with flexible repayment tenures. Below are the best government start up loan schemes for startups and MSMEs.

1. Bank Credit Facilitation Scheme

National Small Industries Corporation, also known as NSIC, aims to fulfil the credit facilities and requirements of the MSMEs. The start up business loan by the Indian Government, under the NSIC scheme, has partnered with several banks in India that provide loans to the MSMEs.

The repayment tenure of this loan ranges between 5 to 7 years. The maximum tenure can go up to 11 years. However, it mostly depends upon the startup’s income.

Objectives of Bank Credit Facilitation Scheme

  • Providing bank loans to various MSME units by collaborating with public and private sector financial institutions.
  • It also offers the MSMEs to either shift their existing account or opt for a new account in a new financial institution.
  • The bank credit facilitation helps the MSME units in filling up their application forms for loans. This scheme also helps them in guiding and preparing as well as submission of documents for the same.
  • Under this startup business loan by the Indian Government, the MSMEs can avail loans at competitive interest rates from financial institutions. Also, it awards the MSME units a Performance and Credit rating by the Indian government for a favorable loan rating.
  • This scheme provides financial assistance to the MSMEs and helps in their growth.

Loans under this Scheme

  • Term Loans
  • Working Capital Limits
  • Non-Fund Based Limits

Features

It integrates public and private sector financial institutions for credit facilitation to the MSMEs.
It helps MSMEs get liberal rates of interest under the award, Performance and Credit rating by the Indian Government that the MSME units receive for favourable ratings offered by the associated financial institutions.

Under this scheme, the documentation and application process has become easier as the NSIC offers aid for loan processes to the MSMEs.

Under this scheme, the MSMEs can also receive support and help to open a new account in another financial institution or shift their existing bank account.

With the Bank Credit Facilitation Scheme, the MSMEs are also clutched on the finances of the financial institution concerning their leading policy.

MSME units also get the option to filter and target credit proposals that are favourable to them and sponsored by the NSIC.

2. Pradhan Mantri Mudra Yojana (PMMY)

Micro Units Development and Refinance Agency (MUDRA) is one of the small business loans for startups under Pradhan Mantri Mudra Yojana (PMMY). It was launched in the year 2015. This scheme was initiated to offer loans to MSMEs and individuals with the assistance of various financial institutions.

This scheme has strengthened the credit facilitation and financing system for the MSMEs. New and existing MSME units involved in service sectors, like manufacturing or trading, can avail loans under this scheme. The PMMY provides loans under three categories: Shishu, Kishor and Tarun loan categories.

Objectives of Pradhan Mantri Mudra Yojana (PMMY)

  • Offers collateral-free refinancing of the loan from lenders to small businesses or individuals.
  • Creating an umbrella system of formula financing for the small enterprise and their account enterprises.
  • Bringing affordable credits to the MSME units.
  • To provide an integrated financial pillar for the micro-enterprises.
  • To integrate the informal economic behaviour into the formal sector.
  • Monitoring the microfinance institutions.
  • To generate and increase job opportunities in micro-enterprise units.

Loans under this Scheme

  • Shishu – For loans of up to ₹50,000.
  • Kishor – For loans starting from ₹50,001 up to ₹5 lakhs.
  • Tarun – For a loan ranging between ₹ 5lakhs to ₹10 lakhs.

Features

  • It offers loans under three categories – Shishu, Kishor, and Tarun.
  • ₹10 lakhs is the maximum loan amount that borrowers can avail.
  • The rate of interest is decided based upon the applicant’s profile and the business’s requirements.
  • The processing charge is zero, or, in some cases, it can be 0.50% of the loan amount.
  • It is a collateral-free loan for the MSME units.
  • The repayment tenure under this scheme ranges between 12 months to 5 years.

3. Credit Guarantee Scheme (CGS)

Credit Guarantee Scheme (CGS) is one of the start up business loans offered by the Indian Government. The scheme was launched to strengthen the credit delivery system and the financial facilitation for the MSME units.

The MSME units (both new and existing) involved in the services sector or manufacturing services can avail of loans under this small business loans for startups.

Sectors, such as retail trade, self-help groups (SHGs), agriculture, training institutions and others, are not eligible for loans under this scheme. Private and public sector banks, NBFCs, foreign banks, regional rural banks are some lending institutions offering business loans under this scheme.

Objectives of Credit Guarantee Scheme (CGS)

  • Make bank credit facilities available to the MSME unit without any hassles.
  • Strengthen the credit delivery system for micro and small enterprises.
  • Proper financial facilitation for the micro and small enterprises.
  • Making lenders give importance to the project viability of the micro and small enterprises.
  • Providing security to credit facilities based on the financed asset’s primary security.

Lending Institutions under this scheme

  • Regional Rural Banks (RRBs)
  • Scheduled Commercial Banks (SCBs)
  • Small Finance Banks (SFBs)
  • Small Industrial Development Bank of India (SIDBI)
  • Non-Banking Financial Companies (NBFCs)
  • North Eastern Development Finance Corporation Ltd. (NEDFi)
  • National Small Industries Corporation (NSIC)

Features

  • Both new and existing micro and small enterprises can apply for loans under this scheme start up business loans.
  • Funded and non-funded credit facilities of up to ₹200 lakhs are available for eligible borrowers.
  • The loan under this startup business loan scheme does not require any collateral or a third-party guarantor.
  • Guarantee cover from 50% up to 85% is available for the sanctioned loan amount availed under this scheme.
  • The guarantee cover on the sanctioned loan amount is 80% for the women owners of micro or small enterprises.
  • A loan guarantee cover of 80% is available for the credit amount of ₹50 lakhs in the north-eastern region of India.
  • In case of a default on credit availed by the enterprise from the lending institutions, the CGTMSE organization will provide a guarantee covering up to 75% of it.

4. Standup India Scheme

Understanding the hardships faced by the SC/ST and women community in India, Prime Minister Narendra Modi launched Standup India Scheme in April 2016 so that people from these communities can become self-sufficient and start their own business venture.

Under this government start-up loan, every associated financial branch provides loan amounts between ₹10 lakhs and ₹1 crores to one scheduled tribe (ST) or scheduled caste (SC) individual and a minimum of one woman borrower.

Objectives of Standup India Scheme

  • Building a strong ecosystem that promotes innovation and startups in India.
  • Encourage sustainable growth for the businesses.
  • Create large scale employment via startup businesses in India.
  • Reduce the burden of regulations on startups.
  • Keeping compliance costs low so that startups can focus on their core business.
  • Providing loans to at least one SC/ST community member and women.

Loans under this Scheme

  • Working Capital Loans
  • Term Loans

Features

  • A composite loan that includes both working capital and term loans.
  • The Scheduled Commercial Banks provides it. Its branches can be accessed through the Standup
  • India SIDBI portal online, directly visiting the branch, or via the Lead Magistrate of the District.
  • The amount provided under this loan is between ₹10 lakhs and ₹1 crores.
  • The SC/ST or women will receive this loan if they are undertaking business for the first time in manufacturing, trading, or the services sector.
  • The borrower needs to provide either guarantee in the CGFSIL (Credit Guarantee Fund Scheme for Stand Up India Loan) or collateral security.
  • The maximum repayment tenure for the loan under this scheme is 7 years.
  • The moratorium period for loan repayment is 18 months.

5. Sustainable Finance Scheme

The startup business loan of Sustainable Finance Scheme comes under the Small Industries Development Bank of India (SIDBI). This scheme has been launched to fund projects for sustainable development that contribute to cleaner production and energy efficiency but are not covered under the bilateral or international lines of credit.

Projects related to green buildings, renewable energy, green micro finances, eco-friendly labelling, Bureau of Energy Efficiency (BEE) star rating, etc., are eligible for business loans under this scheme.

Objectives of Sustainable Finance Scheme

  • Both new and existing MSMEs are eligible for loans and assistance under the Sustainable Finance Scheme.
  • Existing MSMEs should have a track record of their previous performance along with a sound and stable financial position.
  • Existing MSMEs should not be at default in any of the financial institutions.
  • Funding under this scheme will be provided to the MSME units with a good credit history. These units should have the investment of credit rating grade according to the internal credit rating model.
  • Renewable energy units can get funding for both captive and non-captive purposes.
  • Waste Management MSMEs can also get funding under this scheme.
  • Original Equipment Manufacturers (OEMs) can receive assistance and funding if an MSME supplies to other MSMEs.

Features

  • Up to 90% of the project cost is covered under this scheme.
  • The borrower must bear the 10% margin of the amount.
  • MSMEs involved in manufacturing and services can get the funding under this scheme.
  • The maximum loan repayment tenure under this scheme is 36 months.
  • The minimum loan amount per borrower is ₹10 lakhs. However, its maximum limit does not go over ₹150 lakhs.
  • Collateral security or guarantor is required in some financial institutions.
  • In some cases, the CGTMSE cover is also available for funding under this scheme.

Things to Remember for Startup Business Loans Application

Before applying for a startup business loan, be mindful of the below points.

  • Make sure to start with a sound business plan for convincing the lender to approve your application.
  • Prepare both past and future financial statements to submit to the lender to show them that you can repay the loan amount.
  • Do not forget to mention the purpose and the loan amount you need under the government startup loans schemes.
  • Analyse your credit history. If it is lower than the required score, wait a while and build a good credit score before applying for start up business loans.
  • Research government startup loans and lending institutions to find the right one for your startup business.
  • Find out everything about the loan, such as how long it will take to pay back, the possible interest rate, how the loan amount can be used, how much time it will take to disburse the loan, etc.

Eligibility Criteria for availing Startup Business Loans

Below is the list of eligibility criteria borrowers need to fulfil for startup business loans.

  • Applicant’s age should be between 21 and 65 years.
  • They should be an Indian citizen.
  • They should have a sound business plan.These are the basic eligibility requirements for every financial institution that provides government startup loans. Along with these, every financial institution will have its own set of eligibility criteria that the applicants need to fulfil.

Required Documents for Startup Business Loans

Below are the important documents you would require for a startup business loan application.

  • Passport size photographs
  • Identity Proof
  • Proof of Address
  • Proof of Age
  • Statements of Bank
  • Income Proof
  • Proof of Signature
  • Proof of IFSC code

5 Important Benefits and Features of Startup Business Loans

Here are the five major benefits and features of a startup business loan.

  • A startup business loan is collateral-free and does not require third-party guarantees. This makes it an easy financial tool to get business capital for your startup.
  • Startup loans for new businesses and existing ones come with flexible and easy repayment tenures.
  • Minimal documents are required for availing a business loan for startups.
  • The funds are disbursed in a short time to the account of borrowers.
  • The applicant’s profile and business requirements play an important role in the interest rate charged by the lenders.

3 Ways to Apply for Startup Business Loans

There are three ways you can apply for a startup business loan. Read on to know how you can do so below.

  • Online Application: Visit the official portal of the lender of your choice. Fill the loan application form and attach the documents asked by the portal.
  • Offline Application: Visit the branch of the lending institution and submit the documents to initiate the loan application.
  • Via Call: You can also call the customer care centre of the lending institution and request them to assist you with startup business loans application procedures.

Ways to Improve Chances of Getting Startup Business Loans

The eligibility of startup business loans depends on various factors. So, if you are going to apply for a startup loan for a new business, follow these steps mentioned below to increase the chances of getting your application approved.

  • Maintain the company’s cash flow as it will be an important metric to check your business’s well-being and repayment capabilities.
  • Make sure your credit score is up to the mark. If it is not, wait for some time and improve it. The credit score is significant for the applicants as through it, lending institutions check the applicant’s creditworthiness.
  • Building a repayment plan is crucial. This will help in making payments on time. You can easily calculate your EMIs for the flexible repayment tenures offered by the lenders and choose the loan term that fits your monthly budget.
  • Compare the offers of various lenders to help you find the right lending institution for startup business loans.

Frequently Asked Questions (FAQs)

Can I get a loan to start my own business?

Yes, now new entrepreneurs can also get financial support for starting their own businesses under various schemes launched for startups by the Indian Government. These business loans will be given to you after analysing the nature of your business and your profile, such as credit history, age, etc.

What are the best small business loans for startups?

The best small business loans for startups under government schemes are best for a startup business in India. Some include Mudra Yojana, MSME Business Loan in 59 minutes, Credit Guarantee Scheme (CGS), Coir Udyami Yojana, and Credit Link Capital Subsidy Schemes, among others.

What is the eligibility criteria for a startup business loan?

Being an Indian Citizen, having a credit score of 700 or above, age between 21 and 65 years, etc., are some of the major requirements that need to be fulfilled to avail a startup business loan.

Are loans good for startups?

Startup business loans are one of the best avenues to raise capital for startups. These loans give better leverage and are also a better income source for a profitable venture than the shared capital.

What is the maximum amount that can be availed of as a startup business loan?

The maximum loan that a startup business can avail of is ₹ 1 crores with flexible repayment tenure and a low-interest rate.

Is there any government loan for a startup business?

Yes, there are numerous government loans for startup businesses, such as Mudra Yojana, MSME Business loan in 59 minutes, Credit Guarantee Scheme (CGS), Coir Udyami Yojana, Credit Link Capital Subsidy Schemes, Standup India, Sustainable Finance Scheme and many more.

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