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Finding the right source of capital is one of the first and the most crucial issues of startups in India. Several businesses that have good ideas fail not due to the lack of demand of their product but due to the delay in funding or their plans or does not fit their cash flow cycle.
Digital adoption, supportive policies, and an improved access to formal credit make the startup ecosystem in India grow at an extremely fast pace. Nevertheless, there are still numerous founders who cannot figure out the best way to finance their idea according to their revenue model, repayment potential, and long-term growth perspectives. This guide identifies the key startup funding sources in India and their misuse or lack of understanding by business owners.
Financially and lending-wise, a startup is an immature business that is based on innovativeness, scalability, and expansion potential. Startups in India are registered as a private limited company, LLP, or partnership company.
In order to enjoy regulatory and financial incentives, startups may turn to recognition by the Department of Promotion of Industry and Internal Trade (DPIIT). The DPIIT recognition also enhances credibility in the process of loan evaluation and allows the company to apply to schemes and tax subsidies sponsored by the government. The Startup India platform has official guidelines.
Established startups are able to obtain tax and compliance incentives that enhance the overall financial sustainability. They consist of exemptions of income tax during three consecutive years under the sub-heading 80IAC and exemption of angel tax, which depends on the conditions.
India Income Tax Department offers an elaborate guidance on the compliance, reporting and eligibility requirements. Companies that operate within regulatory standards tend to encounter less bottlenecks in processing loans and in the requirements.
Startup funding has ceased to be restricted to either equity or venture capital. Structured credit products tied with cash flows and operational performance are currently provided by banks, NBFCs, and institutions that are supported by the government.
Working capital finance assists the startups to cover daily cost including salaries, rent, technology, inventory and paying bills. It works well particularly in businesses where the customers pay the companies late or where the billing cycles are irregular.
The Reserve Bank of India has promoted controlled lending to start-ups and small enterprises by formal credit schemes, which enhance the availability of working funds.
Startups that have organized growth strategies, including market expansion, scaling their operation or technology upgrades, should take term loans. These loans are of fixed terms and repayment.
When lending term loans, lenders tend to pick up the ones that have a consistent revenue stream and a foreseeable cash flow projection.
The infrastructure, manufacturing, logistics, and healthcare sectors are examples of startups that need high levels of investment in equipment. Machinery loans enable businesses to purchase assets and the expenses are spread out over a greater duration.
Guidelines provided by the EXIM Bank of India can also be used in asset financing of export-oriented startups.
Government-sponsored initiatives are important in enhancing access to credit, particularly to start-ups at the early levels and those that are asset-light.
The Credit Guarantee Scheme of Startups lessens the collateral needs by giving credit guarantees to the lenders. This allows startups who are qualified to access loans without the common security. The information can be found in the resources of Startup India.
Startups are assisted by the Small Industries Development Bank of India (SIDBI)
by direct lending, refinance programs and fund-of-funds programs. Such programs enhance the general credit markets of startups and MSMEs.
Companies providing goods or services to major companies or government buyers can enhance flow of cash by discounting invoices using RBI endorsed TReDS designs. This will enable faster access to capital without raising long term debt.
Startups that are export oriented are prone to long brokering periods between delivery and receipt of payment. Pre-shipment credit assists in the production requirement, whereas post-shipment credit assists in the payment of debts. The Directorate General of Foreign Trade (DGFT) issues export finance norms.
The line of credit enables startups to attract funds on demand and only pay interest on the borrowed amount. It is applicable where the funding will vary with time.
With Loan Against Property, a startup holding residential or commercial real estate property can borrow at quite reduced interest rates and over a longer period of time.
NBFCs usually have quicker approvals and tailored funding options especially to startups who might otherwise fail to satisfy bank requirements. India regulates the work of NBFCs, which are regulated by RBI.
Delays in payments may also have serious effects on cash flow of a startup. Programs such as MSME Samadhaan assist the qualifying businesses to overcome payment delays and enhance financial discipline. On time collections also improve credit profiles and loan eligibility.
The number of organized and controlled funding sources that can work with startups in India keeps increasing. With wise financial management and good borrowing practices, business will have a solid base and help them to grow over time.
It can also be used by founders to estimate the repayment at the earliest possible time by using EMI calculators and selecting financing sources that fit their cash-generating abilities and business stage.
