Funding your New Business Idea – Non-Equity Way

By BankBazaar.com | December 7, 2009

With new developments under the Ministry for MSME (Micro, Small and Medium Enterprises), banks are given guarantee for their loans to the small and medium enterprises under the aegis of Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). Hence the trend to give loans without collateral is picking up. the cover by CGTMSE goes upto Rs. 1 crore.

Once we have done our fine-tuning of the business idea based on the Grand Ma’s Pitch as discussed in Part 1 of this series, we are ready to approach other for the funds.

The First Round of Funds

The first round of fund ideally should come from family and friends. The benefit is that they can give us a soft loan (low interest rates and long repayment). Generally their surplus is given to the innovator with the clause “give it back when you make the money”. Unfortunately not all entrepreneurs have rich relatives and friends. Don’t worry help is on the way, from the extended family called the ‘Government”.

Indian Scenario for Innovation Support

We are living in good times in India to be an innovator. There are a number of Government and private agencies supporting and nurturing innovation. The prime support for innovation is The National Science & Technology Entrepreneurship Development Board (NSTEDB), which aims to convert “job-seekers” into “job-generators” through Science & Technology (S&T) interventions. There are a number of schemes and support agencies which function under the umbrella of NSTEDB.

Incubators

There are about 50 business incubators in India. The are centers that incubate the business ideas with support such as common infrastructure facilities, sheds, mentoring, access to domain experts, support to reach funding agencies, etc.  On reaching a comfortable business level, the businesses can graduate form the incubators to grow on their own. The older and most successful incubator in India is TREC-STEP (Trichy Regional Engineering College – Sceince & Technology Entrepreneur Park). This incubator and its Executive Director, Mr.RMP Jawahar, have won various International Recognitions for supporting entrepreneurs.

As an incubatee, the businesses also get service tax exemption till they achieve a turnover of Rs.50,00,000/- or for the first three years of being an incubatee which ever comes first.

Specialist Incubators

There are new breeds of incubators who are focusing on specialized areas. Some of them are IKP Knowledge Park, Hyderabad, which is a specialist in Life Sciences; Bannari Amman Institute of Technology – Technology Business Incubator focuses on Biotechnology; and Composites Technology Park, Bangalore.

TePP

The TePP Fund (Technopreneur Promotion Program of DSIR (Department of Science and Industrial Research, Government of India) is a grant. So it is better than a loan. Also the agency does not ask for any equity or share in Intellectual Property Rights. That way the fund is something that is really a boon for an innovator. The TePP has a series of funds starting from students in colleges to test their “Crazy Ideas” and prove concepts. At this stage the maximum quantum of funds is Rs.75,000/-. Dr.AS Rao, the head for the TePP fund says that he, “supports crazy ideas at this stage as the fund is meant to give innovators the ‘Freedom to Fail’. Many innovators are afraid to experiment and theirs ideas die before they are born. By giving the freedom to fail, TePP promotes innovation. Many ideas may fail, but even one successful idea can change the world.”

Then comes the Phase I fund which supports concept to become prototypes. At this stage the grant is upto a maximum of Rs.15,00,000/-. Next is Phase II or the commercialization phase where the fund again a grant is given to commercialise the venture into a full fledged business. Here the maximum amount of the grant is Rs.45,00,000/- subject to the innovators bringing in Rs.15,00,000/- as their contribution. The innovators’ contribution need not be equity it can also be a bank loan.

Now who could ask for more? The approval for the grant is based on submitting an application through the Nodal Agencies which are spread across the country. These are basically the Incubators based out of educational Institutions. The applications can be submitted throughout the year and reviews are held almost every month with expert panels. Based on the approval of the panel, funds are released from the Government of India.

TDB Seed Fund

Technology Development Board, is a statutory body, to promote development and commercialization of indigenous technology and adaptation of imported technology for wider application. This was created under the Technology Development Board Act, 1995.

Some of the prestigious and large projects funded by TDB are the REVA Electric vehicle and the Diesel Engine for Tata Indica car which is the first fully Indian Diesel engine. The TDB has also funded companies for specific products research – some of the beneficiaries being Santha Biotech, Ranbaxy, Biocon, Samtel, Nicco, ECIL, etc.

The TDB Seed fund is to identify and support early stage ideas and companies and make them eligible for the larger TDB funding. The seed fund is administered through selected incubators. The fund is given in the form of a soft loan with the maximum amount capped at Rs.25,00,000/-.

Bank Loans

Bank loan as a source for non-equity funding for new business is hard to come by unless one has collateral. So for a first time entrepreneur, a bank loan may not be within reach.

With new developments under the Ministry for MSME (Micro, Small and Medium Enterprises), banks are given guarantee for their loans to the small and medium enterprises under the aegis of Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). Hence the trend to give loans without collateral is picking up. the cover by CGTMSE goes upto Rs. 1 crore. There is a fee of upto 1.5% of the loan amount which may be passed by the lending bank on to the entrepreneur. The annual service fee to get the cover again can go upto 0.75% of the loan amount.

The fees are worth it because they are minor compared to not getting a loan for want for want of a collateral.

Summary

If based on the pitch, some of our relative cannot give us the funds to give life to our bright idea there are several government agencies that can support us at a very early stage. All these agencies are manned by highly professional, well educated and result oriented people with a mission to support entrepreneurship in India. The support is given irrespective of the educational background, location, caste or religion of the entrepreneur. The only things required from the entrepreneur are a good idea, and the fire-in-the-belly to stand by the idea. It is a wonderful time to be an entrepreneur and innovator in India. Seeing the proactive support given to thousands of entrepreneurs across the country by these agencies makes the author “Proud To Be An Indian”.  Jai Hind.

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