About 70% of Indian startups are affected by the COVID-19 pandemic and finding funding and finance in this scenario is like searching for Holy Grail. This segment is badly affected due to continuous business disruptions caused by COVID-19 epidemic lockdowns declared by Central and state governments. All the startups face various challenges, i.e., low demand of products, non-availability of labor, mismatch in their revenues and expenditure and meeting their financial commitments.
Startup Market: Current Situation
The government has now announced various revival packages to bring the economy back on track, for which economic stimulus has been introduced. Research on MSMEs revealed that the monthly operating costs have gone up due to the COVID-19 crisis in India. In April 2020, most startups had less than a month of liquidity. About 27% were already out of funds, while only 6% could handle operations for more than six months.
Startups Market Facts
- According to Venture research, funding for startups for March 2020 dropped by over 50 % compared to previous months.
- According to NASSCOM research, around 60% of all B2C startups were facing closure and have kept their businesses shut down, in nationwide lockdown.
- Banks are struggling with Rs 9.35 trillion of loans, which constitutes about 9.1% of their total assets.
- 70% of startups have cash reserves to last less than three months.
- 92% reported a serious decline in revenues, with around 40% of startups that have either temporarily halted operations or are in the process of shutting down in the near future.
Debt Financing NBFCs
Loans from NBFCs (Non-banking financial company) are similar to loans from banks as they offer many banking services like loans and credit facilities, private education funding, TFCs (Term Finance Certificate), retirement planning, trading in underwriting stocks and shares, money markets. Usually, loans offered by NBFCs are without collateral and can be considered the best option for startups.
Startup Market Funding: Government Initiatives
- Collateral Free Automatic Loans The government has come up with 'Atmanirbar Bharat', also known as a self-reliant movement, to reduce the impact of lockdown on MSMEs. It includes a special economic package of Rs 20 lakh crores, including MSMEs, with Rs 3 lakh crores of collateral-free automatic loans. Borrowers can avail of this scheme with up to Rs 25 crores outstanding and Rs 100 crores turnover with a tenure period of 4years with a moratorium of 12 months on principal repayment.
- Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGTMSE) MSMEs Ministry and small industries development bank of India (SIDBI) established a trust in 2000 named the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) to provide credit risk mitigation to lenders. MLIs will sanction loans up to certain limits without any collateral or security. Under this scheme, startups and MSMEs can avail loans or working capital loans up to Rs 2 Cr. To apply for this loan, you need to submit your startup idea or business plan to any 133 MLIs, after which the bank will sanction the loan according to eligibility.
- MUDRA Loans MUDRA scheme was launch to develop and finance the MSMEs sector by lending microfinance support on the regional level. It offers loans in three tiers depending upon the amount, namely Shishu", "Kishor" and "Tarun. Shishu loans are offered mainly for promoting startups and are given more importance.
- Stand-Up India This scheme has been launched under the startup India movement to offer bank loans between Rs 10 to Rs 1 crore to members of scheduled caste, scheduled tribes and women to set up new businesses with tenure of seven years and a maximum moratorium period of 18 months.
Other Government Schemes
The government has also launched some other schemes in addition to these, such as:
- The government has announced the financial support of Rs 20,000 crores as subordinate debt for stressed MSMEs.
- A corpus of Rs 10,000 crores has been set up to overcome the shortage of equity for MSMEs with growth potential in future.
- The government has decided to disallow the global tenders up to Rs 200 crores.
- E-market, instead of the traditional market, will be promoted to solve equity and marketing related issues.
- EPF support of Rs 2500 crore for businesses will be provided for three months.
- A micro-credit scheme has been launched to offer business loans up to Rs 10 lakh through Microfinance institutions to small businesses and self-help groups to promote small business activities.
Startups Market Funding: Private Sources
- Equity Financing Startups could also collect funding through equity financing, in which investor or venture firms invest with the motive of earning maximum returns in future. Companies pay through their shares, which are also known as equity. There are three categories of equity financing:
- Bootstrapping It occurs when the promoter funds the startup with their own money.
- Angel investors These investors inject capital for a business startup in exchange for loans, convertible debt or ownership equity. They are willing to accept risks and chances with returns. They are classified into two types: affiliated, associated with the business in some way or another and unaffiliated, which has no connection to commercial or acquaintance.
- Venture Capitalists Venture capital firms invest in new firms and startups using funds from their partners. These firms are run by professional investors, also known as venture capitalists. They believe in investing in startups with long term growth potential to tenfold their returns on investments.
- Strategic Investors They are similar to venture capitalists, but they are usually less aggressive on valuation.
- Convertible Debt Financing Companies borrow money from an investor or firm intending to convert debt to equity at some point in time. They serve multipurpose features of bonds as well as an option to own stocks as well. Companies are benefited by raising capital without immediately diluting their shares.
Debt Financing by Banks
Businesses were short of funds and had two options, i.e. either to bring more funds or approach commercial banks for working capital funds. At the time of Covid-19, if arranging equity finance from the market is next to impossible then, getting a collateral-free loan from commercial banks is an uphill task.
The government facilitated Startups by directing Banks to sanction additional working capital loans equal to 20% of existing exposure without extra collateral security, postponing moratorium period & repayment schedules up to August 2020. It is an expensive option for raising funds as the company has to get involved with an investment bank that will systematically structure the big loans. It is only beneficial when interest rates are low, and returns are promising. Indian bank association has decided to give more time to companies to pay back loans by extending moratorium and even extending the tenure of loans. Permitting postponement of servicing of loan interest and term loan instalments up to August 2020 may not bring the desired results as Startups are not very financially sound to withstand the damages done by the Covid-19 outbreak and lockdown restrictions. It is also predicted that Non-performing assets (NPAs) could be doubled to around 18-20% by the end of FY20.Motivating Line
Abreast government support, India's top venture capitalists and angel investors, along with four major Venture capital firms, namely Sequoia Capital, Matrix Partners, Accel and Kalaari Capital, have come together to help out startups that are directly linked in developing goods and services to help to fight coronavirus outbreak by setting up a fund of Rs 100 Crore.
There are various funding options available for startups during COVID 19 outbreak. However, availing of them can be a pretty challenging task. Amidst the economic crisis, there is still a silver lining for startups that government and the lenders would join hands together to cope with the current situation and capitalize on these changes to succeed in the future.