Countries across the world have enforced strict lockdown measures in an attempt to tackle the rampaging COVID-19 pandemic, killing the economy’s cash flow in the process. The revenues of many companies, especially startups and small scale enterprises, have been hurt inadvertently.
The venture capital investments in the country have declined as much as 22% YoY in the first quarter. There is a survival problem for several companies.
To address the problem, the Small Industries Development Bank of India (SIDBI) has launched a ‘COVID-19 Startup Assistance Scheme’ to provide working capital loans to growth-stage startups. SIDBI, an institution that specializes in equity funding, would be helping startups with financial assistance for the first time.
Under the scheme, SIDBI will provide credit facilities to those startups who’ve recorded sustainability and adaptability of operations amidst the lockdown but are facing a cash crunch during the pandemic. The working capital term loans will be provided at an interest rate of 10.50% per year on reducing balance (WDV) and to be paid in a maximum of 24 installments.
The loan amount is restricted to ₹2 crores per startup with loan terms extending up to 3 years including an utmost moratorium period of 12 months.
The term loan can be considered against the firm’s GST refunds and the proceeds can be used for working capital requirements including but not limited to salaries, wages, rent, administrative expenses and payment to vendors.
However, the startups cannot use the loan to pay any ongoing debt including venture capital debt or traditional bank debt. The scheme also restricts promoters and investors to liquidate their stake without SIDBI’s approval.
SIDBI will set up a recommendation committee of 5 members – 3 from SIDBI and its nominees and 2 from the venture capital industry to expedite the working capital loan processing within 45-60 days.
The bank has drafted certain eligibility criteria for the loan.
First and foremost, startups should have positive unit economics and positive net worth. The government will consider only those companies as startups that have raised funds through at least one of the alternative investment funds registered with SEBI. The promoters and founders of the startups should have invested their capital in the business as well.
The startups should have a minimum employee base of 50 employees and should be incorporated for less than 10 years. These companies should have a minimum turnover of ₹10 crore and a maximum turnover of ₹60 crores in FY19 and FY20.
Moreover, the applicants should demonstrate innovative measures and proof of concept for ensuring smooth business operations during the lockdown and should have taken adequate measures to tackle employee safety from the COVID-19 disease.
Startups that already have any ongoing working capital loan from any bank or has been written off any alternative investment fund or startups in financial stress other than COVID-19 issues will not be eligible to get financial assistance under this scheme.
Eligible startups can read the scheme related documents here for more details.
It is to be noted that more than 99% of the Indian startups won’t qualify for SIDBI’s scheme because of the terms and conditions.