Loans without margin

Seed Capital Fund Scheme signifies hope for first generation entrepreneurs

Srinagar, Publish Date: May 22 2018 11:37PM | Updated Date: May 22 2018 11:37PM
Loans without margin

An email from a group of first generation entrepreneurs gives me a reason to talk today about importance of money in a successful business venture.  The group, consisting of some youth belonging to varied fields, have assembled under an umbrella to capitalise on the power of Internet. They have planned an e-commerce platform with base in J&K state and offer convenience of online shopping to the consumers in the state as well as across countries.

Their communication reveals that they were encouraged to explore the idea of e-commerce business after finding more and more local consumers embracing the virtual world as a safe and convenient place to shop. Since the group constitutes unemployed educated youth, their main problem is lack of financial resources. Now they were seeking guidance in finding an appropriate financial resource to fund their business venture.

"We have no other option but to borrow money. Since we are unemployed and have no margin and collaterals to offer, will banks finance our project?" This is what they precisely wanted to know.

Before answering to the query, let's have a look at the scenario around us. We live at a place which is full of complexities - be it in terms of political landscape, deteriorating socio-economic set up or its geographical location. Amid these complexities, it's the menace of unemployment and lack of jobs which over a period of time has burgeoned and has frustrated the youth. There is a large section of unemployed youth looking at some start-up business opportunity to seek their self employment. But most of the times lack of finances forces them to shelve their business plan.

Even as funding such start-up business projects is among the core functioning of the financial institutions including banks, it's the lack of margin and collaterals which stops banks to fund such projects. Notably, the margin is a certain percentage of the money you need to start your business and you need to pay from your own pocket. While the rest is paid by the bank in the shape of a loan. And the sanctioning of the loan is directly related to the margin. First you have to pay the margin and then the loan would be sanctioned in your favour.

Collaterals is mainly in shape of third party guarantee or mortgage of immovable property.

In most cases we have observed that the first generation entrepreneurs or start-ups don't have this margin or collateral to meet the requirement of the financial institutions. So, their business projects stand shelved.

Now coming to the core issue of seeking financial assistance in absence of margin and collateral as expressed by the group of youth to start their e-commerce venture. The state government has already placed a Seed Capital Fund Scheme in place to help educated youth to take up entrepreneurship as a career option.

This is the scheme which has been tailored for individuals and the likes of Group mentioned above, as the start-up money is not required under the scheme and no collateral or mortgage of property is asked.  The working of the scheme includes seed capital to be provided by the state government. This seed capital is basically the start-up money, which means it is treated as contribution by the borrower. The first generation entrepreneur has to submit his project to the J&K Entrepreneurship Development Institute (JKEDI), which will vet the project and provide training to the entrepreneur. The training cost would be borne by the state government. After the training is over, the Institute will sponsor the entrepreneur to the bank for financial assistance up to 65% of the project cost.

As per the guidelines, the prospective entrepreneurs in individual category are to be provided with seed capital equivalent to 35% of the project cost up to a maximum of Rs.4 lacs in respect of undergraduates, Rs.5 lakh in respect of graduates and Rs.6.50 lacs in case of post-graduates. Technically qualified first generation entrepreneurs would get a seed capital component up to Rs.10 lacs. For Group initiatives, like the one mentioned above, the upper limit of the seed money has been relaxed up to sum-total of individual entitlements. Notably, the seed money is non-refundable.

Meanwhile, it would be in the fitness of things if you, before conceptualising your plan to start a business, have a look at the money available with you or the resources which can fund  your project.  Evaluate how much revenue you can generate out of your business activity. At the end of the day, your revenue minus your cost of goods - be it products or services - should be decent. You need to have at least a decent gross margin of around 40%. Out of this gross margin you should be able to fund your operating expenses and also earn a reasonable net profit.


(The views are of the author and not that of the institution he works for)




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