Raising Credit for Startups through Banks – CGTMSE

Bootstrapping a startup can be an arduous task. Especially raising capital while growing can be a daunting goal to achieve. The most popular approach seems to be approaching Angel Investors for cash in lieu of stocks or a partnership in the startup. Though less risky and usually reliable, this approach also has its own pitfalls like determining how much ownership to cede?, involve the investors in management roles? etc.

One common way out usually prevalent in small manufacturing units is to approach banks for loans. Banks do provide loans to software startups, but typically demand some kind of a collateral (assets like buildings, fixed deposits, gold, etc). Manufacturing companies usually have their machinery and other tangible assets mortgaged to raise loans. But the typical tangible assets of a software company do not have any collateral value and usually withers away in a few years. Hence raising loans for a software company can be a hair raising experience :-)

We too were in a similar situation some years back. We wanted to raise some capital to upgrade our infrastructure, power backup, furniture. We had recently incorporated our former partnership firm into a private limited company. We approached State Bank of India with our requirement. SBI also had recently started a dedicated unit staffed with sufficiently experienced and friendly managers.

We were informed about a scheme called Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) run by the Central Government to support small companies like ours. The idea is that the Fund guarantees (insures) your loan. If you default, the loan is repaid to the Bank by the Fund. To do this, the Fund charges a annual fee (around 0.5-1% of your loan amount) as a premium for insuring your loan.

Here are some notes learnt from our experience with taking and repaying the loan.

  1. Loans are available from Rs. 1 – 50 Lakhs.
  2. The basic requirement is that the unit must be registered as a Small Scale Industry. To register as a SSI you have to go the District Industries Centre and submit an application. (They are working on taking the registration online as well. http://122.181.176.179/dic1/). YMMV!
  3. The loan application must be backed by a sound and realistic business plan. (We were quizzed sufficiently on the business plan by very competent managers)
  4. Though the credit worthiness of the promoters/partners is not a criteria their background, qualification, experience, net worth are factors that are considered.
  5. The business plan must also be accompanied by finalised quotations, proforma invoices, purchase orders from established vendors or service providers. The proceeds of the loan are paid directly to them as per the plan.
  6. In most cases, 100% of the required amount will not be sanctioned but a certain percentage is expected to be contributed by the company as margin money. (As with any other home loan)
  7. There might be a holiday period of 3-6 months (based on your negotiations) when only the interest on the loan needs to be paid.
  8. Typical tenors for these loans are around 5 years or 60 months.
  9. The interest rates on these loans are typically 1% more than the PLR.
  10. Upfront fees and charges include processing fee, CGTMSE’s fee, Stamp duty charges, Charge creation fee with the Registrar of Companies (If applicable),
  11. Annual charges include the bank’s regular fees and charges, insurance, CGTMSE fee.
  12. In addition to the Term Loan, you can also avail a working capital or Over Draft based on the same guarantee.

The bottom line is that, raising a credit line without putting your precious assets in the line is possible and easy. Some people scoff at the very idea of raising credit and recommend taking angel investments instead. But IMHO that is a hugely debatable point on its own and shall save it for another day.