Does Your Startup Need a Loan? Here's What You Need to Know

Explore everything you need to know about getting a loan for your startup, including government initiatives. Learn how to decide whether a loan or funding is right for your business.

There are nearly 1 lakh 40 thousand startups in the country recognised by the DPIIT (Department for Promotion of Industry and Internal Trade). With the competition in the country on the rise as more startups gun for greater recognition within the startup ecosystem, this feeling is also accompanied by a feeling to scale your startup.

While venture capital may appear to be the most straightforward option for raising your first round of funding, it often comes with considerable pressure to scale rapidly—sometimes misaligned with your long-term vision for the business.

We’ve written extensively about the different options available for a founder to raise that first round outside of venture capital, you can read about that here. Of the most pertinent options that are out there at a founder’s disposal, perhaps the most stark is a loan.

Here’s everything you might need to know about how to get a loan for your startup and what the process entails.

Also read: Role of DPIIT in startups

Determining your loan readiness

Before you head on to apply for a loan, it’s important to assess if your business is ready to take-on additional debt. The easiest way to determine whether your business is ready to take on a loan even before you seek out a potential lender, is to take a business loan readiness assessment.

While they typically vary from business to business, a business loan readiness assessment will look at various parameters that are crucial to your business to see if you are eligible for a loan.

Here’s a short checklist that will help you keep your progress on track

• Define your loan purpose very clearly- Why is this loan essential to your business and what you do? Writing this down and clearly defining it may help you understand how much money you might need and ensure that the funds you raise are properly utilised. The loan purpose can be anything from capital expenditure on a factory to help scale your business or used towards developing your first MVP.
• Create a strong business profile- Analyze your startup's function, establishment date, unique selling points, and business plan. Typically a business profile will help lenders distinguish your firm from competitors, so having a strong business profile might help make your business a viable proposition for lenders.
• Assess your current business path- Keep an active record of your company’s business performance including revenue growth, expense management, and cash flow stability. If you’re able to show a strong record, that might make your business more viable to get a loan.

Government initiatives for startups

Over the years, the government has come up with initiatives that are focused on boosting the startup ecosystem to greater heights. For startups that do not want to raise venture capital, this route becomes a viable option to raise any capital that is necessary.

To be eligible for loans under startup initiatives, startups must first be recognised under DPIIT. At WeWork Labs, we’ve helped several startups register their companies under the DPIIT and their local government bodies, you can read all about it here.

Once this step is complete, these are some options that startups can avail a loan or funding under any of these schemes:

Startup India Seed Fund Scheme (SISFS)
Date of initiation: 2021 

• Key features Provides financial assistance for early stage startups Startups can raise up to ₹20 lakh for proof-of-concept and up to ₹50 lakh for scaling operations.
• Eligibility Criteria Startups must be DPIIT recognized, incorporated within the last two years, and have not received more than ₹10 lakh from other sources

Pradhan Mantri Mudra Yojana (PMMY)Date of initiation: 2015 

Key features Startups can raise loans up to ₹10 lakh through three categories:

• Shishu: Loans up to ₹50,000 for early-stage startups.
• Kishor: Loans from ₹50,001 to ₹5 lakh for expansion.
• Tarun: Loans from ₹5 lakh to ₹10 lakh for established businesses.

Eligibility criteria: Minimal documentation required.

Other schemes: Atal Innovation Mission (AIM) which supports startups with grants up to Rs 10 crore and access to incubators, National Small Industries Corporation (NSIC) offers various financial assistance schemes, including technology upgrades and raw material support.

Loans versus Funding: Which is right for you?

When considering how to finance a startup, entrepreneurs typically face two primary options: taking a loan or raising equity funding. Each method has distinct characteristics, advantages, and disadvantages that can significantly impact the startup's trajectory. The advantage with taking a loan for your startup is that you retain more control over your business and do not have dilute ownership. Fixed repayment schedules make financial planning more straightforward for your business.

Whereas with funding, investors do not require immediate returns; they profit when the company grows. By raising funding you also get access to a larger network which can help you particularly in the early stages of growth.

What would you rather do in the early stage of your business? Let us know! See you in the next WeWork Labs Blog.