How to Get Term Loans and Working Capital for Startups in India: A Complete Guide

Every great business begins with a brilliant idea, but turning that vision into a successful venture requires a crucial ingredient: capital. For entrepreneurs across India, securing adequate funding is often the first major hurdle. Understanding the right financial tools is essential for sustainable growth. This is where a clear grasp of term loans for startups and working capital loans becomes vital. Term loans provide the fuel for long-term expansion and asset acquisition, while working capital keeps the daily operations running smoothly. This comprehensive guide will serve as your roadmap, demystifying the various startup funding options India has to offer. We will provide clear, step-by-step instructions on how to secure the right financing, meet eligibility criteria, and leverage powerful government schemes, exploring the most effective financing solutions for Indian startups.

Understanding the Difference: Term Loans vs. Working Capital Loans

Before approaching a lender, it’s critical to understand which type of loan aligns with your business needs. Choosing the wrong financing can lead to cash flow mismatches and strain your company’s finances. A term loan is designed for significant, one-time investments that will generate value over several years, whereas a working capital loan is a short-term solution to manage the operational liquidity of your business. Both are powerful tools, but they serve distinct purposes in a startup’s financial strategy. By identifying whether you need to fund a large asset purchase or simply cover day-to-day expenses, you can approach the application process with clarity and confidence, significantly increasing your chances of approval.

Decoding Term Loans for Startups

A term loan is a specific amount of capital borrowed from a financial institution, which you receive as a single lump sum. This loan is repaid over a fixed period, or “tenure,” through equated monthly instalments (EMIs), which include both principal and interest. The primary purpose of term loans for startups is to finance long-term, capital-intensive investments that are foundational to business growth. This includes purchasing heavy machinery, acquiring a commercial office space or factory, undertaking significant infrastructure expansion, or upgrading technology. Key features include a predetermined repayment schedule, which simplifies financial planning, and interest rates that can be fixed or floating. The tenure for these loans typically ranges from one to ten years, depending on the loan amount and the nature of the asset being financed.

Grasping Working Capital Loans India

In contrast, a working capital loan is a short-term financing solution designed to cover a company’s everyday operational expenses. It ensures that a business has enough cash to manage its day-to-day activities without disruption. The primary purpose of working capital loans India is to bridge the gap in the operating cycle—the time between paying for raw materials and receiving payment from customers. These funds are used for recurring expenses such as paying employee salaries, purchasing inventory, settling utility bills, and managing other immediate liabilities. Unlike term loans, working capital loans are often structured as a revolving line of credit or an overdraft facility, giving businesses the flexibility to draw funds as needed up to a pre-approved limit. Their tenure is much shorter, usually up to one year, and repayment terms are more flexible to align with the company’s cash flow cycles. Understanding your working capital requirements for startups is the first step to ensuring operational stability.

At a Glance: Key Differences

To make the distinction clearer, here is a simple comparison between the two loan types:

Feature	Term Loan	Working Capital Loan
Purpose	Long-term assets, expansion	Daily operations, cash flow
Tenure	1-10 years	Up to 1 year
Repayment	Fixed EMIs	Flexible (e.g., lump sum, as per cash flow)
Loan Type	Lump-sum disbursal	Revolving credit, line of credit

Are You Eligible? Checking the Criteria for Term Loans and Working Capital

Securing a loan requires meeting the lender’s eligibility criteria, which are designed to assess the borrower’s creditworthiness and repayment capacity. For startups, this process can be particularly challenging as they may lack a long history of financial performance. Lenders meticulously evaluate several factors, including the business’s operational history, revenue, the financial health of its founders, and, most importantly, the viability of its business plan. Preparing your documentation and understanding these criteria beforehand can significantly streamline the application process and prevent common pitfalls. It demonstrates professionalism and shows the lender that you are a serious, well-prepared entrepreneur ready to take your business to the next level.

Core Term Loan Eligibility for Startups

While criteria can vary between banks, NBFCs, and fintech lenders, most financial institutions look at a common set of parameters. Understanding the core term loan eligibility for startups is crucial for preparing a strong application.

• Business Vintage: Traditional banks often require a business to be operational and profitable for at least 2-3 years. However, many new-age fintech lenders and government-backed schemes have more relaxed norms for newer startups.
• Annual Turnover: Lenders usually have a minimum annual revenue threshold that your business must meet to be considered for a loan. This figure proves that the business has a market and is generating sales.
• Credit Score: The personal credit score (CIBIL score) of the promoters or directors is a critical factor. A score of 750 or above is generally considered ideal, as it reflects a strong history of financial discipline.
• Profitability: For established startups, lenders will typically ask for proof of profitability for the last one to two financial years. This assures them of the business’s ability to generate surplus cash for loan repayment.
• A Solid Business Plan: For new startups without a long financial history, a detailed and convincing business plan is non-negotiable. It must include realistic financial projections, a clear market analysis, and a detailed explanation of how the loan will be used to generate revenue.

Essential Documents for the Startup Loan Application Process

A well-organized set of documents is the backbone of a successful loan application. Having everything in order before you apply can prevent unnecessary delays and create a positive impression on the lender. The startup loan application process requires you to furnish proof of identity, business existence, and financial stability.

Here is a checklist of essential documents you will typically need:

• Identity & Address Proof: PAN Card, Aadhaar Card, Passport, or Voter ID of all promoters and directors.
• Business Proof: Certificate of Incorporation (for companies), Partnership Deed (for partnerships), GST Registration Certificate, and any other relevant business licenses.
• Financial Documents:
  • Audited financial statements (Balance Sheet, Profit & Loss Account) for the last 2-3 years, if applicable.
  • Bank account statements for the business’s primary account for the last 12 months.
  • Income Tax Returns (ITR) filed for the business and all promoters for the last two years.
• Business Plan/Project Report: A comprehensive report is essential for new businesses. It should detail your business model, target market, competitive analysis, marketing strategy, management team profiles, and detailed financial projections, including cash flow statements.

A Step-by-Step Guide: How to Get Loans for Startups in India

Navigating the loan application journey can seem daunting, but breaking it down into manageable steps makes it much more approachable. The key to success lies in meticulous preparation, thorough research, and a clear understanding of your own financial needs. This structured approach, from initial assessment to final disbursal, ensures that you are in control of the process. Following these steps on how to get loans for startups in India will not only increase your chances of securing funds but also help you find the lender and loan product that best fits your business vision and operational realities.

Step 1: Assess and Define Your Funding Needs

Before you even think about applying for a loan, you must have a precise understanding of how much money you need and exactly what you will use it for. Start by creating a detailed list of your expenses. Separate them into two categories: capital expenditures (CapEx) and operational expenditures (OpEx). CapEx includes one-time purchases of long-term assets like machinery, equipment, or property—these are best funded by a term loan. OpEx includes recurring costs like salaries, rent, inventory, and marketing—these fall under working capital. Accurately calculating your working capital requirements for startups based on projected sales and payment cycles is crucial. This detailed assessment not only helps you apply for the right loan amount but also forms a critical part of your business plan, showing lenders that you have a clear and strategic vision for their money.

Step 2: Research and Compare Lenders

The Indian financial market offers a diverse range of lending institutions, each with its own set of pros and cons. It is essential to research and compare these options to find the best fit for your startup.

• Banks (Public & Private): Institutions like SBI, HDFC Bank, and ICICI Bank offer competitive interest rates and structured loan products. However, their eligibility criteria are often stringent, with a strong preference for businesses with a proven track record.
• NBFCs & Fintech Lenders: Non-Banking Financial Companies (NBFCs) and modern fintech platforms are known for their faster processing times and more flexible eligibility criteria. They are often more willing to fund newer startups, although their interest rates may be slightly higher than those of traditional banks.
• Government Schemes: The Government of India has launched several schemes specifically to promote startup business financing in India. These programs often come with benefits like lower interest rates, relaxed collateral requirements, and credit guarantees.

Step 3: Prepare Your Application and Submit

With your funding needs defined, documents organized, and lender chosen, it’s time to complete the application. Pay close attention to every detail on the application form to avoid errors that could cause delays. Your business plan is the centerpiece of your application—it should be professionally prepared, comprehensive, and persuasive. It must clearly articulate your business model, market opportunity, and financial projections. Ensure that all supporting documents are clear, up-to-date, and submitted in the required format. If you find financial projections or preparing a project report challenging, TaxRobo’s expert team can assist you in creating a professional and compelling package that meets lender expectations.

Step 4: The Evaluation and Sanction Process

Once submitted, your application enters the lender’s evaluation stage. The lender will conduct due diligence, which involves verifying your documents, analyzing your financial statements and business plan, and checking your credit history. They may contact you for additional information or clarification. Be prepared to answer questions about your business model, revenue projections, and repayment strategy confidently. If the lender is satisfied with their assessment, they will issue a sanction letter detailing the approved loan amount, interest rate, tenure, and other terms and conditions. Review this letter carefully before accepting the offer.

Leveraging Government Schemes: Financing Solutions for Indian Startups

The Indian government has recognized the immense potential of startups and has rolled out several initiatives to provide them with accessible and affordable credit. These schemes are designed to reduce the risk for lenders and encourage them to fund new and innovative businesses, especially those that may not meet the strict criteria of traditional bank loans. Exploring these financing solutions for Indian startups can be a game-changer, offering benefits like collateral-free loans, interest rate subsidies, and credit guarantees. These programs are instrumental in fostering a vibrant entrepreneurial ecosystem and empowering a new generation of business leaders.

Pradhan Mantri MUDRA Yojana (PMMY)

The Pradhan Mantri MUDRA Yojana (PMMY) is a flagship scheme aimed at providing funding to non-corporate, non-farm small and micro-enterprises. It offers loans up to ₹10 lakh through commercial banks, RRBs, small finance banks, and NBFCs. The loans are categorized based on the funding need and stage of business development:

• Shishu: Loans up to ₹50,000 for businesses that are just starting.
• Kishor: Loans from ₹50,001 to ₹5 lakh for businesses looking to expand.
• Tarun: Loans from ₹5 lakh to ₹10 lakh for established enterprises.

You can learn more and apply through the official MUDRA portal.

Stand-Up India Scheme

The Stand-Up India Scheme is designed to promote entrepreneurship among women and individuals from Scheduled Castes (SC) and Scheduled Tribes (ST). Under this scheme, every bank branch is mandated to facilitate bank loans between ₹10 lakh and ₹1 Crore to at least one SC/ST borrower and at least one woman entrepreneur for setting up a greenfield enterprise. This enterprise can be in the manufacturing, services, or trading sector. The scheme aims to create a more inclusive entrepreneurial landscape by providing financial support to underserved communities. For more details, visit the official Stand-Up India portal.

Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)

One of the biggest obstacles for startups is the requirement of collateral or a third-party guarantee. The CGTMSE scheme was created to address this very issue. It provides a credit guarantee to lending institutions for the loans they extend to micro and small enterprises, covering up to 85% of the loan amount. This guarantee reduces the lender’s risk, making them more willing to provide collateral-free credit of up to ₹5 Crore. Startups can approach banks and specifically request that their loan application be considered for coverage under the CGTMSE scheme. You can find more information on the official CGTMSE website.

Conclusion

Securing the right funding is a critical milestone in every startup’s journey. By understanding the fundamental differences between term loans and working capital, you can align your funding strategy with your business goals. The key to a successful loan application lies in meticulous preparation—from accurately assessing your financial needs and organizing your documents to crafting a compelling business plan. It’s equally important to explore all available startup funding options India offers, paying special attention to government schemes like MUDRA, Stand-Up India, and CGTMSE, which can provide a significant advantage. A robust business plan remains the cornerstone of this entire process, serving as your primary tool to convince lenders of your vision’s viability.

The path to securing term loans for startups requires diligence, patience, and strategic planning. If you need expert guidance on preparing your project report, organizing your financials, or navigating the complexities of the startup loan application process, don’t hesitate to seek professional help. Contact the financial experts at TaxRobo today!

Frequently Asked Questions (FAQs)

1. Can I get a term loan for a startup without collateral in India?

Yes, it is possible to get a term loan without collateral. The most effective route is through government schemes like the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), which encourages banks to lend without demanding security. The MUDRA Yojana also offers collateral-free loans up to ₹10 lakh. Additionally, some fintech lenders specialize in offering unsecured business loans based on the strength of your business model and cash flow projections, though these may come with higher interest rates.

2. What is a good CIBIL score to get a startup loan?

For most lenders, a strong credit history is non-negotiable. When evaluating a startup, they heavily scrutinize the personal CIBIL scores of the promoters or directors. A CIBIL score of 750 or above is highly preferred and significantly increases your chances of loan approval. A high score demonstrates a track record of financial responsibility and creditworthiness, giving the lender confidence in your ability to manage debt effectively.

3. How are working capital requirements for startups calculated?

Calculating working capital needs for an established business often involves the operating cycle method, which uses the formula: (Current Assets – Current Liabilities) or more specifically, (Inventory + Accounts Receivable) – Accounts Payable. However, for a new startup without historical data, this calculation is based on projections. You must forecast your monthly operational expenses (salaries, rent, utilities, marketing) and estimate the cash conversion cycle based on your industry. This projection should be a core component of your business plan.

4. How long does the approval process for term loans for startups India take?

The timeline for loan approval can vary significantly depending on the lender. Traditional public and private sector banks typically have a more rigorous due diligence process, which can take anywhere from 2 to 6 weeks from application to disbursal. In contrast, NBFCs and fintech lenders leverage technology to expedite the process and can often provide a decision and disburse funds within 7-10 business days, assuming all your documentation is complete and in order.