Governments across the globe have enforced strict lockdowns in an attempt to halt the progress of the rampaging Covid-19 pandemic, killing in the process cash flows and revenues of many companies and inadvertently hurting economies.
This coupled with the choking of venture capital investments which have witnessed a 22% YoY decline in the first quarter has caused survival woes for several companies in the startup ecosystem.
Recognizing these problems, Small Industries Development Bank of India (SIDBI) has launched a ‘COVID-19 Startup Assistance Scheme’ to provide working capital loans to growth-stage startups. The financial institution which conventionally specializes in equity fund investments only would be extending credit to startups for the first time.
Under the scheme, SIDBI will provide financial assistance to startups who’ve demonstrated the sustainability and adaptability of operations amidst the global pandemic but are facing a cash crunch.
As per the scheme document, these working capital term loans will carry an interest rate of 10.50% per year on reducing balance (WDV) and to be paid in a maximum of 24 instalments.
SIDBI has restricted loan amounts to Rs 2 crore per startup with loan terms extending up to 36 months including an utmost moratorium period of 12 months. This loan can be considered against the firms’ GST refund and the proceeds can be used for various working capital requirements including salaries or wages, rent, administrative expenses and payment to vendors.
However, the loan cannot be used to pay any debt including venture debt and the scheme restricts promoters and investors from liquidating their stake without SIDBI’s permission.
With an aim to expedite these working capital loans within 45-60 days, SIDBI will set up a recommendation committee of 5 members – 3 from SIDBI and its nominees and the remaining 2 from Venture Capital Industry – for rapid processing.
The financial institution has listed certain eligibility criteria for the loan, which besides having positive unit economics and positive net worth for the startup, will also include some key conditions and they are :
The government defined startups which have received funding through at least one of the alternative investment funds registered with SEBI. Promoters or founders of startups should have invested their own capital in the business as well.
- Startups with a minimum employee base of 50 employees and should have been incorporated for less than 10 years.
- Startups having FY 2019 and FY 2020 minimum turnover between Rs 10 crore to Rs 60 crore.
- Applicants should have demonstrated innovative measures for ensuring business continuity during the COVID-19 period and have taken adequate measures and ensured employee safety and their financial stability.
- Any startup which already has a working capital facility with any bank, has been written off by alternative investment funds, or the startups which are in financial stress usually (other than COVID-19 related issues) have been ruled out of this scheme by SIDBI.
Eligible startups can access the scheme documents here on the SIDBI portal for further details regarding loan terms and procedure. It’s worth noting that over 99% of the Indian startups won’t qualify for SIDBI’s ‘COVID-19 Startup Assistance Scheme’ because of the high bar set. Even 90% of startups backed by VCs won’t make the cut.