The Banks are an indispensable part of startups and small businesses.
They give us loans in our country. If we are lucky, they do give us unsecured business loan for startup in India.
When we started our venture, banks for me was a place where client sent their money and we got our salaries
disbursed for our staff.
As our business grew, I realized the constructive role a bank can play in our company’s growth.
They definitely have a bigger role than you and I can think of . Especially, helping our startups/business grow.
For a new startup finding its feet, the first thought to cross the mind of the Entrepreneur running the startup, when you talk of a bank is “How do we get an unsecured business loan in India for our startup?”.
Unsecured business loan because most of us rarely have a property to speak of. The ones with Dad are strictly out of limits for startups.
All we have is “faith” to help us sail through and faith barely helps in meeting salary expenses.
Hence, we look for loan for business without security.
Banks can help you raise a decent amount of money as an unsecured business loan. A loan for a start up or a small business helps keep the ship afloat.
As your relationship grows with the bank, you can definitely leverage your good relationship to get unsecured loans for business from them based on your company’s balance sheet and a good banking record after a certain time duration. (note: The unsecured funding rule might not be applicable to you if you are just starting or do not have a decent balance sheet)
The banks in India are tricky to deal with. (I am told they are the same all around the world)
We have worked with a few banks in last few years.
Over the course of time, I have learned many lessons while dealing with them.
I am sure they will come in handy for you to grow your business.
Here are few tips for you and your business:
Never keep all your eggs in a single basket:
Never ever deal with a single bank. We just learned it the hard way, when our preferred bank refused to give us a loan.
Today, we deal with 3 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 till you show a good average monthly balance and a healthy balance sheet.
Bottom line is, always have more than 1 bank account.
Maintain a clear line of communication:
Every bank has a relationship manager for your bank account.
At least, banks claim they do.
Startup and small business owners have their own battles to fight.
How is it relevant for you? In fact, where is the time to communicate with your relationship managers?
Take a small piece of advice (free). Get to know your relationship manager.
The manager might pester you once or twice in making few investments and I do not blame them as they have their targets to meet.
Anyways, it will be all worth getting pestered, if you know how to use your relationship with your manager.
Here is what your manager can do for you:
o Get the charges on your account reversed. Businesses are unpredictable. You never know which quarter you might not maintain the minimum balance or there are some bounces. Your relationship manager can get them reversed.
o The RM can help you with cheques, cash deposit, applying for loans, etc, etc.
o They tell you before hand if a cheque is deposited and your company’s bank account does not have money to get the cheque encashed. Our last bank at times forgot to tell us at the time, thereby leading to bounces which adversely affected out CIBIL score. This is an add-on service you get, once you keep up a good relationship with your RM.
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 number of signs they make me sign on the documents I do not understand a thing about. 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 the harder to read documents of banks.
Has it helped? No.
But I still try to be an informed customer.
Old habits die hard.
I have been cheated in past by partners when I trusted and signed without reading the document.
As they say “Once bitten. Twice shy”.
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 document.
The innocuous looking document might turn into a daemon tomorrow. At least, go through the important points.
One habit I have improved in last few years is helping the loan guys with all the documents they need.
Not an easy thing to do, when their insatiable demand for documents is beyond your control.
Be patient with your loan officer. Their job is harder than yours. Appreciate the time, they are putting in getting your papers to bank.
The more your help them. The sooner the file moves.
Don’t be a grumpy customer who complains to them every time they need more many 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 very fine guy.
He was always around the corner to listen to our grievances.They were the friendly neighborhood 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 did 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. Especially, 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 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 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 back on us when we should have received an unsecured business loan for our startup based in India from them.
Here are the mistakes (a “not to do” list for every new business) we had done:
We asked for an unsecured loan:
Our company does not have a property.
The company’s directors have two properties. One is in a village where our bank does not have a branch.
The only property available with me is not registered with govt because the builders in Noida are broke and refuse to get the property registered.
So, we wanted a “high risk” unsecured loan.
The lesson learnt 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 are able to 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.
The Bad CIBIL Score:
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.
Filing a low ITR:
Your CA might tempt you to keep the profits low to save taxes or get a good TDS refund.
A low ITR is a reflection of the poor performance of business.
Banks talk only in black and white. You will not be able to convince them your growth story till your papers speak them clearly.
ITR is an important 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 them for the loss. It was some new govt notification which had some amount added as a loss.
The next year it was to be added as profit. Some rocket science which he could explain to banks.
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 and had it bounce 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 loan from two banks. How we got new banks is another story.
We walked into few banks. Shared our banking financial and future projections with them. Showed them our progress.
Since our old bank had run us dry by scrutinizing our documents to the point of no return.
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.
It’s a line of business where they give us less interest and take double the interest when we take money from them. This is where they make profits.
You just have to convince them with your balance sheets and ITRs.
Before i end, let me give you steps to get unsecured business loan for startups in India:
a. With private banks, there is no way you can get an unsecured loan if you are a startup or a new business. Private banks only entertain you when you have a solid balance sheet to back your business. So stop wasting your time trying to raise unsecured business loans from them in the initial days of your startup.
b. Government banks have a plethora of schemes from central government to help fund new businesses and startups. Most of the loans i have heard are small amounts ranging from 1 lakh to 10 lakh under MUDRA (read : how to raise funds under mudra) and other schemes. You can also apply under scheme like startup india. I have met quite a few entrepreneurs who have raised funds under these schemes and they are doing well. In fact, I think the fund size is enough to help you start your journey and test your idea before you decide to go big. You should prepare a project plan and send the required documents to government for approval of loans under this scheme and you might be able to raise a decent amount of unsecured loan for your startup.
Although, it is a herculean task to get funded our govt schemes (one of the points I mentioned under my last articles My expectations from startup India)
You can try by finding some links in the government bank in your area.