Quite often to scale up operations, we are left scratching for viable banking options. This is more the case for start-ups. Business loan is somewhere down the line always required to run operations as well as for expansion purposes. However, the key question that would need to be answered is what kind of loan would a start-up be qualified for or is it part of the SME ecosystem.
Difference between a Start-up and an SME
As per the Ministry of Commerce and Industry, Government of India, the key difference between a start-up and an SME lies in the business model. The latter is stated to be a temporary organisation that is in discovery mode, searching for a scalable business model.
The latter is an established enterprise with an assured customer base and a healthy business pipeline and turnover. SMEs in India are categorised into three sectors:
- Micro Enterprises
- Small Enterprises
- Medium Enterprises
The financial structure followed by these enterprises is radically different from that of a start-up. Hence, the business loan disbursement method is different too.
For an SME, looking for a start-up loan would not only be a waste of time but foolish too. MSME loans are meant to fund industries that follow a tried and tested path. Their requirements are much larger than that of a start-up. Owners and founders of MSME industries started their business to become a part of the consumeristic market and feed the demand. In the process, the companies would earn a profit. The primary objective of Small and Medium Scale Enterprises is to create a market and expand sales.
For a start-up, the vision is the ultimate pathfinder. The entire premise of finding a start-up is to disrupt the current processes and create a legacy. They will not plunge into the cut-throat business of selling for profit but will take a long-winded route of building a new market from scratch.
So which, should one go for?
For financial institutions, providing a business loan to any entity comes with inherent risks, the most important being, and the inability of the borrower to repay the business loan amount back. Hence, they are quite stringent while giving out loans.
A business loan will have a greater number of clauses compared to a personal loan, because of the risk factor and the large amount. Founders of start-ups would have to provide a sound business plan to win a business loan. For MSME loans, the business leader would only have to provide the financial credentials of his or her company. If the financial institution is satisfied with the credibility of the organisation, the MSME loans are approved immediately.
Both an MSME and a start-up have their own benefits. There are special provisions for both envisaged by the government. Tax holidays are given to start-ups while there are special economic zones for MSMEs.
To conclude, while one is looking for a business loan, a finance draft should be implemented to decide on the type of loan that would be required. If the company is less than 7 years old, it is always advisable to avail of a start-up loan.
Frequently Asked Questions
What are start-up business loans?
Start-up business loans are the business loans created to meet the varied needs of entrepreneurs belonging to the startup ecosystem of India. These startup business loans can be made use of in order to meet operational costs, infrastructure cost, equipment cost, etc.
What is the eligibility for start-up business loans?
To qualify for a start-up loan, you need to:
- A resident citizen of India.
- You should have a minimum of 700 as your CIBIL score.
- Two years of business vintage
- The minimum annual turnover should be INR 2 lakhs.
- Your age must be between 21 years to 65 years
What is the MSME loan?
MSME Loans for Small Medium Enterprises are business loans that are meant for only small and medium-sized enterprises. These loans are launched to meet the requirements of SMEs.
How can I Avail an MSME loan?
To avail of an MSME loan from a leading NBFC like Ziploan, you need to meet their eligibility criteria like having a ZipScore of a minimum of 550 and with no previous records of loan defaults or any settlements.