Why Start-ups Should take Business Loans

India ranks third globally in the number of start-ups, which crossed 4,200, according to a NASSCOM report in October 2015. Start-ups are thriving in the country, owing to the competitive environment, better opportunities, better infrastructure modules and ease of finance. Finance is one of the most essential aspects for any corporate entity: whether it is a start-up or an established firm. The smooth flow of money is required to setup a business, for its day-day functioning and growth and expansion.

Advantages of Debt Financing

Start-ups may have a tough time funding their enterprise, especially in their nascent stage. Business loans are one of the most suitable options at this time, as well as in the company’s later stages. Here are few points that prove why start-ups should opt for corporate loans.

Business loans

1.     Reduces Personal Liability – Funding your business through your personal savings might have crossed your mind. Although it frees you of the burden of repayment, it comes with its own set of risks. Being a start-up, you can’t expect returns on investment during the initial years and there is a risk of loss as well. Moreover, it is wise to store your savings as an emergency fund. Also, you might be able to raise a much larger amount of money by seeking financing.

2.      Ownership Remains Intact – Unlike angel investors and venture capitalists who own equity against their investment in the company, ownership rights remain intact when you take a business loan.

3.      Tax Benefits – The interest payments are tax deductible. It is perhaps one of the biggest advantages that such form of financing offers.

4.      Profits Remain Intact– Much like banks have no say in operational decisions, they also do not have a share in your profits. You can use the profits to repay the credit amount or you can reinvest it.

5.      Long Repayment Tenure – Flexible repayment options makes it one of the most lucrative financing options. Such loans may have a tenure of as long as 10 years. The tenure differs according to the bank’s policy.

6.      Builds a Strong Credit History – SMEs can have large sums of money to fund various business activities. Timely and early repayments help to build a strong credit reputation, which can help you to secure future loans.

Banks and other financial institutions are less than willing to offer unsecured loans to start-ups, owing to the lack of experience and short timeline of business activity. Firms can take loans against securities in such cases. Securities may include inventory accounts, receivables, equipments, insurance policies or property. Banks in India also offer property loans to fund business activities, both against residential and commercial properties.

Looking for a Loan This Diwali ?

According to government estimates, only 4 percent of 57.7 million small business units in India have access to institutional finance, leaving many to rely on informal lenders, says an article published in Reuters in March 2015. Businesses need smooth and continuous flow of capital in order to function, expand and grow. Obtaining business loans from a bank is one of the most preferred options when it comes to fulfilling capital needs.

business loans

Types of Corporate Finance Solutions

Banks and non-banking financial companies have designed products catering to the specific capital needs of businesses. Listed below are some of them.

1.      Capital Market – This service lets business houses monetise their equity investments, such as shares, mutual funds, insurance policies and debt instruments, in order to raise long-term capital. Such a funding option lets you raise loans against shares, securities, mutual funds, insurance policies, and corporate and government bonds. You can also leverage/trade in equity shares at a per-defined margin, also known as margin trade funding and IPO financing. Customised and specialized solutions for every company are also offered.

2.      Corporate Finance – Corporate finance options are available to SMEs, and mid and large corporate houses. The various types of credit facilities available under this category aim to fulfil the working demand and growth capital needs of the businesses. Corporate finance includes working capital demand, term loans, SME loans, transaction facilities with bankers, line of credit, structured finance, treasury risk solutions as well as invoice discounting. You can also acquire credit under treasury risk solutions that enables you to protect your business against currency volatility.

3.      Commercial Real Estate and Mortgages – Property is leveraged to borrow funds for immediate and long term financing needs. This credit facility lets business houses borrow money through customized products, such as loans against property/property loans, lease rental discounting, construction finance as well as commercial property purchase loan.

4.      Project and Structured Finance – This product specifically provides financing for projects in the infrastructure, core, manufacturing, hospitality, education and healthcare sectors. Credit is offered for the project as well as for interim financial needs, for additional funding requirements beyond senior debt and equity as well as corporate loans that help companies tide over unforeseen/unplanned fund requirements by providing credit for general corporate purposes.

5.      Debt Syndication – This enables companies to raise short term and long term funds through the banking sector or the broader debt market. It basically refers to loan advisory services, where the lending company coordinates all activities related to syndicating a bank loan to meet various requirements of the borrower, which might include capacity expansions, working capital requirements, refinancing of existing obligations, merger and acquisition, and leveraged buyouts.