The Banks are an indispensable part of the day-to-day operations of any business in India (startups, small businesses, and large enterprises).
And though, they are considered as a place to pay salary, get client’s payments by startups and small businesses, they hold a special meaning for startups and small business by offering funding.
And trust me, there is nothing like a loan which can help you run your business smoothly(note – 29% of startups fail because they run out of cash).
Moreover, these are difficult times when businesses are trying to sustain during coronavirus. Never has been time so relevant to get a funding to survive than during these tough times.
In this blog, I will be discussing all i know about one of the form of funding called as unsecured business loan for a startup in India or a business loan without collateral for a startup.
Let me tell you a secret. When I started my startup, I had no secured asset to offer as a mortgage to the bank and during the initial years of my startup, I did not even know that banks fund small businesses and startups.
I know it is quite foolish of me to admit to this stupidity but then “to err is human” and to hide is “Donald Trump”. Just kidding 🙂 (ignore my lousy sense of humour)
During our initial days, we worked around generating revenue and utilized the money earned to grow our business (one of the reasons our pace of growth was pathetically slow in the first years of business).
When we started our venture, banks for us was a place where clients sent their money and we got our salaries disbursed.
As our business grew, I realized the constructive role a bank can play in our company’s growth by learning how they can help us survive by giving a startup business loan without collateral.
Guess what, it did take me good three years to learn how to raise an unsecured business loan for startups in India (the country where I live).
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How to Get a Startup Business Loan or unsecured Loan for a startup in India without collateral?
Unsecured business loans are much in demand with startups and small businesses because most of them rarely have a property to speak of. Thereby, putting them in the high-risk category for banks and financial institutions.
All the business entrepreneurs have is “faith” to help them sail through and faith barely helps in meeting salary expenses.
Hence, they look for an unsecured business loan or loans without collateral.
Before I explain you the methods to get unsecured business loans or business loans without collateral for your small business and startups, here are the prerequisites to get an unsecured loan:
- You must own a PAN Card.
- You must have a valid ID proof (Adhaar).
- Your CIBIL Score should be good. If you are one of those youngsters whose CC is stressed, please kiss goodbye to the very thought of getting a bank loan.
- You must be willing to pay a high-interest % for the unsecured business loan (15 to 21%). Yes, I know, the % is high. It is killing but you, my friend does not have a rich dad and your startup hasn’t yet shown any promise.
- And you should have a lot of patience. Banks are taking a Euge (I meant huge – I seriously got to stop watching Trevor Noah make fun of Donald Trump. I have started picking Donald’s English) risk by working with you.
Now, let me quickly get to the question –
“How to get an unsecured business loan?”
These are the options from where you can raise a business loan for a startup without collateral (unsecured business loan):
Unsecured Business Loans from Government Schemes:
Technically, this has never happened.
But things are changing for good because of digitization of banks in India and the government’s immediate attention to startups and small businesses.
So, the Government has come up with few funding options like a scheme called MUDRA where you can raise funds to 10 L Rupees without collateral.
MUDRA is a fantastic scheme where all you must do is approach a govt bank with a business plan and they will give you a loan based on your credentials. Simple and easy. Right?
Well. Here is the catch – You live in India and the only person who gets an unsecured loan from a govt scheme from a govt bank is the one, who knows someone in a bank.
Use your connects and then go to the bank with the right connection else the bank will burden you with 1000 documents to fulfill before you get the loan. To know more about the scheme visit mudra’s website (https://www.mudra.org.in/). By the way, they won’t mention “the connect” part in there. Thank me for this tip later 🙂
Also, do not go to PNB. They are a bank which ties a chain to a 5 Rs. pen and allowed a business owner to run away with thousands of crores 😉
Another scheme where you can apply is Startup India. Do not ask me questions about this scheme as it remains a mystery to everyone in the startup world 🙂
For industries, MSME (https://msme.gov.in/), SIDBI (https://sidbi.in/index.php) have few unsecured schemes where they fund your company’s machines and make the machines as a guarantee. Ultimately, you do not get cash but get machines to start a business that is supported by govt.
Frankly speaking, there are a plethora of schemes for startups and small businesses in India by govt. Unfortunately, other than MUDRA which is a good scheme, I do not know of any scheme which has had a significant impact on the ground.
Again, I am a service industry guy who does not have much knowledge about industries. Please visit MSME or SIDBI to know how to get an unsecured loan for a business or a startup in the manufacturing sector.
Unsecured Business Loans from Banks:
As your relationship grows with the bank, you have the possibility of leveraging your link to get unsecured loans for business from them.
The loan they can sanction based on company’s balance sheet and a sound balance sheet and a sound banking record after a particular time duration (note: The unsecured funding rule might not apply to you if you are starting or do not have a decent balance sheet)
The option might not be valid for new businesses or startups that have just started. Due to rising NPAs, banks have become quite cautious in disbursing loans and will not easily entertain you. Thereby, leaving you to convince them that you won’t default on their NPA through your past banking.
I suggest, you maintain a direct line of communication with your relationship manager and keep the bank updated with your progress to help them qualify you for an unsecured business loan.
Banks look for following factors while disbursing unsecured loans:
- Business Experience of promoters
- Age of Business
- Business growth projections
- Accounts Balance sheet
Unsecured Loans from NBFCs (Non-Banking Financial Companies):
NBFCs comprise of companies that do not qualify as banks but as financial institutions that have the power to lend to you. Again, you are charged an exuberant rate of interest while dealing with them.
The loans from NBFC can come back to bite you with terms and conditions you had not even thought about.
The rate of interest charged by both banks and NBFCs ranges between 16 to 22%. I know, it sounds like moneylender lending you money in old times but it’s an unsecured loan or a high-risk loan.
Financial institutions take a risk by giving this loan to you. Thereby, leading to such high-interest rates.
By now, I told you the simple things you should keep in mind before you start applying for an unsecured loan and the places from where you can get an unsecured loan or loan without collateral.
How about I give you some bonus tips or mistakes or a to-do list to help you deal better with banks.
My to-do list/tips do not necessarily relate to helping you get unsecured funding, but they will help you avoid some mistakes I did as a startup company owner or as a small business owner.
Steps To Get Unsecured Business Loan or Loans Without Collateral For Startups And Small Business:
Decide the right loan for you by comparing:
- Funding requirements of your business
- Current Financial status
- Interest offered by different institutions
- Repayment Terms
- Service charges for loan processing
- Flexibility the loan offers in terms of pre-payments
Submit for pre-assessment or eligibility check:
Most of the banks and NBFCs have a checklist that assesses your eligibility based on a variety of factors including of age, CIBIL Score, balance sheet, business growth, business background of promoters, client list, etc. I would recommend that you start by getting the eligibility check.
The biggest benefit of eligibility check is that it helps you with the paper work that you will be required to submit when you actually apply for the loan. Also, since most of the documents are same in between different banks – it is a good exercise to do a proper paperwork at this stage.
In addition to above, submit the file to at-least 2-3 different institutions.
- After pre -approval submit for final approval:
Once you have an approval from a bank or a NBFC, read in between lines of their loan conditions. I have personally suffered by being a bit causal in understanding how loan conditions work.
If i were you, i would look for:
- Loan processing charges
- What are the loan terms?
- Does the loan allow an early closure? If yes, what are the loan closure charges?
Do not sign the document until you are comfortable. Moreover, negotiate as much as you can with whatever the points are mentioned above.
Always remember – the person who is getting your loan processes gets a commission on the unsecured loans. You definitely have a power to negotiate if you have a standing loan approval from more than one institution.
Do not go for an unsecured loan if you have a property:
Our company does not have an estate.
The company’s directors have two properties (i am not one of them). One is in a village where our bank does not have a branch.
The only property available to us is not registered with govt because the builders in Noida are broke and refuse to get the property recorded.
So, we wanted a “high risk” unsecured loan.
The lesson learned was “If you have a property, at least connect to a bank which has a branch near your property. Unregistered properties won’t mean a penny, even if you have paid the full amount for them”.
Unsecured business loans are not easy to come by. And when you can get one, you get it at an exuberant rate of 16 to 21% per year. Not to forget the processing fees, insurance, investment, etc., etc. the banks will expect from you before they give you a loan.
Avoid Bad CIBIL Scores:
One of our old directors had a miserable CIBIL score which further added to the misery of our company’s credentials.
We had not updated our director’s list for years. Since the director was earlier with the company and now was nowhere active, we had to go back and get the name removed.
Maintain a good CIBIL score and remove the extra directors who move out from time to time.
Do not file a low ITR:
Your CA might tempt you to keep the profits low to save taxes or get a reasonable TDS refund.
A low ITR is a reflection of the poor performance of a business.
Banks talk only in black and white. You will not be able to convince them of your growth story until your papers showcase your growth.
ITR is a critical point for taking a loan.
Let me give you an example. Our company’s turnover doubled in last to last financial year, and the profit hit rock bottom.
I had no idea (the typical marketing – techie guy who hates looking at all this ITR stuff) how the profits went south.
I went to banks thinking they will look at turnover. When they checked the ITR, they refused to fund us the amount we wanted.
We had to get our CA to explain to them for the loss. It was some new govt notification which had some amount added as a loss.
Avoid bounced cheques:
Our company had some hard and soft bounces as cheques for a year before we decided to raise funds.
This one was a bummer.
Do not allow cheque bounces to happen.
When we were in our growing stage, we had a part-time accountant. No one in the company knew where the cheques went and sometimes, cheques were given for clearance even when there was no cash.
When banks came back to us with questions on bounces, we had no answer.
It was sheer negligence.
Once the cheque bounced, one of our intelligent vendors applied the same cheque again for clearance.
The cheque bounced again.
We were going through a tough time. A lot of money was stuck with clients, and our “prompt” vendor made the situation worse by getting the same cheque bounced again and again.
As things stand today, we have stopped giving cheques. All payments are made via online banking now.
We recently raised a loan from two banks. How we got new banks is another story.
We walked into a few banks. I shared our banking financial and future projections with them and showed them our progress.
Our documents were in line, and two banks came on board without hiccups. The next time you deal with a bank. Remember, they need you as much as you need them.
You have to convince them about your balance sheets and ITRs.
To read more about raising funds for startups and small businesses, you can read my next blog “How to raise funds for a startup and small business”.
How Businesses and startups can work with Banks (tips):
Never keep all your eggs in a single basket:
Never deal with an only bank. We just learned it the hard way when our preferred bank refused to give us a loan.
Today, we deal with three banks and divide our bank accounts based on our divisions and services offered by a bank.
For ex, govt banks can never give services at par with a private bank. But govt banks have their own set of advantages, which range from them not disappearing overnight to providing govt scheme-based loans.
Private banks are good with services until you show a right average monthly balance and a healthy balance sheet.
The bottom line is, always have more than one bank account.
Maintain a clear line of communication:
Every bank has a relationship manager for your bank account.
At least, banks claim they do.
How is it relevant to you?
You must be thinking – where is the time to communicate with your relationship managers?
Take a small piece of advice (free). Get to know your relationship manager.
Here is what your manager can do for you:
- Get the charges on your account reversed.
- Businesses are unpredictable. You never know which quarter you might not keep up the minimum balance, or there are some bounces. Your relationship manager can get them reversed.
- The RM can help you with cheques, cash deposit, applying for loans, etc., etc.
- They keep you updated with cheques of your company coming for clearance.
At the end of the day, the relationship managers are there to fight your battle with banks. Think of them as allies and smoothen your banking process.
I know what I have mentioned here is basic stuff. We all are supposed to know this. Right?
Not for first-time business owners. I still know of friends, who have never had their charges reversed or have a slightest of idea on how you can negotiate with the bank.
Do not be scared of the documents:
The one thing I hate the most about the banks is the never-ending signatures I have to do on the papers, I barely understand. Add to this, the number of documents they ask.
All the small letters with “banking lingo” makes it harder for anyone to understand, what is cooking.
Over the years, I have started spending a little time reading these documents.
Has it helped? No.
But I still try to be an informed customer.
Old habits die hard.
I have been cheated in the past by partners when I trusted and signed without reading the document.
Also, one of my close relatives was royally screwed by their bank for signing on blank papers.
So, I try to read as much as I can before I sign over the ticked boxes.
I know you cannot change the document even if you want to, but it does you no harm to at least go through the paper.
The innocuous-looking document might turn into a daemon tomorrow. At least, go through the essential points.
One habit I have improved in the last few years is helping the loan guys with all the documents they need.
Be patient with your loan officer. Their job is harder than yours. Appreciate the time, they are putting in getting your papers to the bank.
The more you help them. The sooner the file moves.
Don’t be a grumpy customer who complains to them every time they need more documents.
They do have more files than you can imagine. When you have applied for a loan, do not let your file go to the bottom of the list because you are the uncooperative customer.
When demand for investment increases and services decrease, time to find a new bank:
When I opened my bank account with our soon to be ex-bank, the manager was a wonderful guy.
He was always around the corner to listen to our grievances. They were the friendly neighbour bank (like Spider man 😉 )
As soon as he left, the new team in the bank was always interested in getting investments done from us.
We could not get out service tax challans from them for months.
All they were interested in was when we would make a new investment with them.
The services degraded, demand for investment increased.
Time had to come to move to a new bank.
Startups or small businesses need money from time to time, notably, during the phase of growth.
Many startup owners are without property which only makes them ineligible for a secured loan, and unsecured loans make banks unsecured.
We were refused a loan twice by the same bank with whom we had maintained a relationship for years.
They said they are following the rule book. Remember, banks are not here to take risks for you. They will only fund you if they find your credentials to be worth investing.
And with rising NPAs, the going just got tough to get a loan for business without security.
The same bank which got investments done from us as and when required, turned their bank on us when we needed them the most.
They just turned their backs on us when we should have received an unsecured business loan for our startup based in India from them.