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Bank Loan as a Source of Finance for Start-up's: A Study

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DOI: 10.37896/sr7.10/010

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Strad Research https://doi.org/10.37896/sr7.10/010 ISSN: 0039-2049

Bank Loan as a Source of Finance for

Start-up’s: A Study
Anubhab Patnaik#1, Srinivas Subbarao Pasumarti*2

Research Scholar, Professor & Dean

Sri Sri University-Sri Sri University
India, India

Abstract- Startup needs to retain tempo with constantly changing technologies and also need to face the risk of becoming
technologically obsolete. High costs of credit and are unidentified major competitive power to match product quality and
standards are some other issues need to be faced by the small enterprises. The growths of these enterprises are
determined by the availability of and accessibility to the financial Resources. Business functions on money but getting
advance from a commercial bank is very difficult and only few of the startups are successful in this. The truth is
associations which are comparatively new attract the least secure credits of any that a bank may understand.

Key Words-Startup, Credit, Advance, Commercial Bank

I. Introduction

A startup requires huge amount of money while the generation of revenue by them is
insufficient. With less profits and huge expenses, startups need funding to survive. Necessary
stability to the business and stable running of the business processes are possible only by
pumping required amount of money to the startups. Availability of finance can make or break
businesses. Startup needs finance for achieving goals, short term and long term activities and for
meeting financial requirements. Finance is important to begin the business operations, for
expanding businesses and to recruit staff. Companies can obtain finance from a lot many Sources
like loans, investors etc.
In the beginning stages, expenses of startup companies' tend to go much ahead then their
earnings as they center themselves on developing, testing and making their idea marketable. In
many cases, they require funding. Startups enterprises always look for financial support from
commercial banks or credit unions, in the shape of business loans or through Small Business
loans from local banks sponsored by government, or approach nonprofit organizations and state
governments for different grants. Easy and quick accessibility to finance for startup enterprises
has always been a challenging issue to address by Economists and startup entrepreneurs.
Efficient financial decisions are essential for the success of a company as it involve the
management of financial activities and financial assets of the business. The seller consumer
relationship is improved by the startup enterprises. Investors play a critical element in
commencing the startups. Successful functioning of the startup gives benefit to the investors as
well. Investors are considered as the backbone of startup enterprises. Investors help the startup
business in many ways.
Funding gaps occur usually in cases of companies in a given point of their life and with special
field of activity. The problem of funding gap is prevalent in young, technology-oriented startup

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enterprises. As a result of the funding gaps, companies with huge growth potential are not able to
obtain the necessary capital for their operation; hence they cannot live up to their growth
potential. Funding gaps evolve in case of startup companies as a result of their special
characteristics. In the seed and early stages of their lives these companies are in the phase of
product development or they have just made their market entry. They are in the lack of
collaterals or significant revenues; hence they are unable to obtain bank financing. Balázs
Fazekas (2015)
II. Literature Review
Sharifi & Hossein (2015) stated that small and Medium Scale financial Enterprises have asset
guarantee pattern where entrepreneur fails to pay the fees of various procedural aspects such as
guarantee fee, valuation fee, asset registration fee which is too high. If the entrepreneurs try to
fulfills the mortgage requirements which again consist several difficult tedious processes.
Additionally, the huge risk, huge cost, and finite profits construct more problems for small and
medium enterprises who apply for a loan from the bank. The capital market and other private
financial institutions develop gradually in India.
Astebro & Bernhardt” (2003) conducted research to establish link between the bank advances
and survival of new private venture”. They expressed that there is a negative connection between
bank advance furthermore, business survival and positive connection between non saving money
advance and business survival. These think about depends on the information alluding to an
arrangement of independent company propelled in 1987 in U.S.
Ghatak, (2010) clarified about of the serious factors confronted by MSMEs in India. These
factures comprised: accessing suitable and timely finance, lack of obtainable information, access
to skillful manpower, R&D facilities and restricted marketing channels. Hussain & Yaqub,
(2010) exposed approximately business encounters confronted by businesspersons in Pakistan.
The conclusions were predictable was means the founders of Pakistan are no diverse. They face
defies that other businessmen face in emerging nations. Scarcity of financial Resources and or
‘lack of access to ‘financial market’ was the ‘most severe problems.
In most situations, they require funding. Startups enterprises always focus for funding assistance
from financial institutions like banks or credit unions, in the different category of loans or
through loans specified for business purpose from local banks sponsored by government, or take
assistance from nonprofit organizations and state governments for different grants. Patnaik &
Srinivas Subbarao (2020)
Commonly banks which are private in nature are afraid to finance to a firm which is established
recently, because a startup faces a number of problems which it has to fix so that it grow into a
successful organization at the same time lack of collateral and high risk of losing are major
barriers too. Rather than preparing the most impactful business strategy for this Startup
Company, the intersection of the regulatory environment and various legal issues and laws of the
country where Startup is planned to be set up. A Startup business should be protected from
specific risk faced by the sector in which it operates.
Domeher et al., (2016) suggest that the issue is not so much that start-ups lack access to capital,
but rather the stringent process of obtaining access to external funding. There is generally little
awareness of what is involved in gaining equity funding and entrepreneurs are mostly under-

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prepared for the lengthy procedures. The application process tends to be bureaucratic and is
slowed down by protocols and red tape as funders endeavor to gain the confidence and assurance
needed to grant funding to entrepreneurs.
H.S. Parekh (2004) looked into the job of financial institutions and state offices in stretching out
credit to small scale units in his thesis and pin directs their mentality of lack of interest in
catering toward the necessities of the small units. He was of the view that budgetary
dissemination need to achieve their lending approaches in consonance with the need of the small
segment all in all and the smaller among the small scale units specifically. A high measure of
hazard is presented from new companies and their financing has a critical job since they help
new businesses at beginning phases to arrive at the degree of gainfulness and manageable
development in the market Shetty (2017)..
Berger & Udell, also stated that at the point when firm proprietors do need to go to external
funding sources, their inclination is for obligation instead of value, since obligation doesn't
expect them to surrender possession or control of the firm. Informational asymmetries are
particularly severe for early stage firms, those in the seed or developmental stages.
The general trouble of new companies in getting to fund is probably going to be bothered by a
weak domestic business environment, including deficient lawful structures and stifled budgetary
frameworks. However, globalization of the budgetary markets suggests that the startup business
people are increasing more access to universal money related markets, but frequently in a
roundabout way, by means of via domestic banking systems. As a result, access to the
international Sources of finance may substitute for domestic institutional weaknesses.
Simultaneously, this suggests startup business visionaries become especially touchy to the
volume and the course of the universal progressions of finance Tornell & Westermann (2005).

III. Conceptual Framework

Every new business needs money. Managing the money of a business is an art and at the same
times a science also. Startups are generally small in size and in the development stage being
funded and operated by few promoters or one individual. The main goal of startup enterprises is
to provide service or a product which is currently not being available elsewhere in the market, or
being offered in an inferior manner. In the beginning stages, expenses of startup companies' tend
to go much ahead then their earnings as they center themselves on developing, testing and
making their idea marketable. Availability, spending and investment of money are crucial to a
business. Capacity of business for allowing the smooth operation and not lacking funds for its
operations decides the importance of finance in business. Making of shrewd and prudent
business decisions concerning cash flows and long term funding plans depend on business
financing. Finance is important in every business for different activities.
The problem of funding gap is prevalent in young, technology-oriented startup
enterprises. As a result of the funding gaps, companies with huge growth potential are not able to
obtain the necessary capital for their operation; hence they cannot live up to their growth
potential. Smooth obtainable finance required for a startup enterprises have always been a
burning issue on focus by Economists and startup entrepreneurs. Funding gaps occur usually in

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cases of companies in a given point of their life and with special field of activity. Funding gaps
evolve in case of startup companies as a result of their special characteristics.
IV. Research Methodology

This study is conducted through primary data collection where a sample of 158 from
Startup’s located in the 18 districts of Odisha are chosen for the purpose of this study. This
geographical area has been chosen as they represent a large number of Startup enterprises in
Odisha. The population frame was drawn from the list obtained from the Startup Secretariat, IED
Odisha. Each Startup was represented with one respondent only. The questionnaires were
distributed based on the random sampling to ensure it is able to represent the sample population.
Data collection was accomplished by Google forms and personal delivery. The population of the
study consisted of promoters and directors in the startup enterprises. The questionnaire
comprised of different categories to collect information on challenges and opportunities faced by
startup enterprises in financing.
Questions are prepared in 5-point Likert Scale. Statistical package IBM SPSS (21) package was
used to conduct all the statistical analysis. For analysis of the collected data test was done using
Chi-squared test and for normality of data skewness test were performed.
Table-1 Demographic profile

Data- Field Survey

This section presents the opinion of startup promoters regarding the factors which create
hindrance in attaining bank finance by startup. Different factors were provided in the questioner
for rating. The rating were taken on Likart 5-point scale (Strongly agree, Agree, Neutral,
Disagree, Strongly disagree). Further for validity of the opinions cross tabulation is done by
comparing background variables of respondents (type of enterprise, age of promoter,
qualification of promoter, experience of promoter) with respondent’s opinion. The validation is
proved using chi-square test.
Table – 2: The #Percentage frequency distribution of all Background variables with respect to
respondent’s opinion# on response of commercial bank towards startup financing and the results
derived from chi-square test are represented in the table below followed by skewness test results.

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Data- Field Survey

Chart-1 Self Develop

Figure- 1 Opinion of Startup promoters on Response of Commercial

Banks Toward startup financing

H01 There is no relationship between the background Variables# of respondents (Type of

Enterprise, Age of Promoter, Qualification of Promoter, Experience of Promoter) with respect to
respondents opinion on response of commercial bank towards startup financing.
Interpretation: The relation between the background variables with #respondent’s opinion on
response of commercial bank towards startup financing are checked using Parsons Chi-square
test of independence.
The χ2-values shown against Type of Enterprise (3.474) #is Not Significant for DF=4.
Therefore, the hypothesis H01: “There is no relationship between Type of Enterprise and opinion
of startup promoters on response of commercial bank towards startup financing” is accepted.

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Accordingly, from the trend obtained from startup promoters of manufacturing and services on
response of commercial bank towards startup financing is uniform. The figure in the Table states
that majority of both manufacturing and service startup promoters are not agreed on this issue.
Similarly, the χ2-values shown against Age of Promoter (3.450) #is Not Significant for
DF=8. Therefore, the hypothesis H01: “There is no relationship between Age of Promoter and
opinion of startup promoters on response of commercial bank towards startup financing” is
accepted. Accordingly, the response obtained from startup promoters of different age groups on
response of commercial bank towards startup financing is uniform. The figure in the Table
highlights that majority of startup promoters irrespective of their age are not agreed on this issue.
Further, the χ2-values shown against Qualification of Promoter (8.661) #is Not
Significant for DF=8. Therefore, the hypothesis H01: “There is no relationship between
educational Qualification of Promoter and opinion of startup promoters on response of
commercial bank towards startup financing” is accepted. Accordingly, the ranking obtained from
startup promoters of different educational qualification groups on response of commercial bank
towards startup financing is uniform. The figures in the Table cite that majority of startup
promoters from different educational qualification groups are not agreed on this issue.
Also, the χ2-values shown against Experience of Promoter (18.128) #is Not Significant
for DF=12. Therefore, the hypothesis H01: “There is no relationship between Experience of
Promoter and opinion of startup promoters on response of commercial bank towards startup
financing” is accepted. Accordingly, the trend of response obtained from startup promoters of
different experience groups on response of commercial bank towards startup financing is
uniform. The figures in the Table cite that majority of startup promoters from different
experience groups are not agreed on this issue.
Table – 3: The #Percentage frequency distribution of all Background variables with respect to
respondent’s opinion# on bank loan as the last choice of finance for startup and the results
derived from chi-square test are represented in the table below followed by skewness test results.

Data: Field Survey

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Chart-2 Self Develop

Figure-2 Rating on Bank Loan as the last choice of Finance for startup

H01 There is no relationship between the background Variables# of respondents (Type of

Enterprise, Age of Promoter, Qualification of Promoter, Experience of Promoter) with respect to
respondents opinion on bank loan as the last choice of finance for startup.
H02 There is association (relation) between the background variables (Type of Enterprise, Age of
Promoter, Qualification of Promoter, Experience of Promoter) with respect to respondents
opinion on bank loan as the last choice of finance for startup.
Interpretation: The relation between the background variables with #respondent’s opinion on bank
loan as the last choice of finance for startups is checked using Parsons Chi-square test of
independence.
The χ2-values shown against Type of Enterprise (3.290) #is Not Significant for DF=4.
Therefore, the hypothesis H01: “There is no relationship between Type of Enterprise and Rating
on startup promoters towards bank loan as the last choice of finance for startups” is accepted.
Accordingly, the trend of response obtained from startup promoters of manufacturing and
services on bank loan as the last choice of finance for startups is uniform. The figures in the
Table cite that majority of both manufacturing and service startup promoters agreed on this issue.
Similarly, the χ2-values shown against Age of Promoter (7.433) #is Not Significant for
DF=8. Therefore, the hypothesis H01: “There is no relationship between Age of Promoter and
Rating on by startup promoters towards bank loan as the last choice of finance for startups” is
accepted. Accordingly, the rankings obtained from startup promoters of different age groups on
bank loan as the last choice of finance for startups is uniform. The figure in the Table states that
majority of startup promoters irrespective of their age agreed on this issue.
Further, the χ2-values shown against Qualification of Promoter (15.250) #is Not
Significant for DF=8. Therefore, the hypothesis H01: “There is no relationship between
educational Qualification of Promoter and Rating bank loan as the last choice of finance for
startups” is accepted. Accordingly, the response obtained from startup promoters of different
educational qualification groups on bank loan as the last choice of finance for startups raising

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credit through bank loan is uniform. The figure in the Table highlights that majority of startup
promoters from different educational qualification groups agreed on this issue.
Also, the χ2-values shown against Experience of Promoter (22.350) is Significant for
DF=12. Therefore, the hypothesis H01 is rejected and the alternative hypothesis H02: “There is
relationship between Experience of Promoter and Rating on by startup promoters towards bank
loan as the last choice of finance for startups” is accepted. Accordingly, the rankings obtained
from startup promoters of different experience groups for raising credit through bank loan is
uniform except in case of 5-10 years experienced category. The figure in the Table shows that
majority of startup promoters from different experience groups agreed on this issue.

V. Findings

 Frequencies are showing Location of Enterprise ratio 87.3 % in urban , 8.2 % in semi-
urban and 4.4 % in rural
 Frequencies are showing Constituent of Enterprise ratio 1.9 % sole proprietorship , 3.8 %
partnership and 94.3 % Pvt Ltd Company
 Frequencies are showing Type of Enterprise ratio 25.3 % Manufacturing and 74.7 %
Service
 Frequencies are showing Gender ratio 89.2 % Male and 10.8 % Female
 Frequencies are showing Age ratio 40.5 % 18-30 Years, 46.8 % 31-40 Years and 12.7 %
41-50 Years
 Frequencies are showing Qualification ratio 47.5 % Graduates, 47.5 % Postgraduates and
5.1 % Professional
 Frequencies are showing Experience ratio 22.2 % Below 1 Years, 26.6 % 3-5 Years, 41.8
% 5-10 Years and 9.5 % Above 10 years
 It is observed that according to type of enterprises, age, qualification and experience on approach
of the government on responsiveness of commercial banks towards financing of startup, the
Pearson chi square values shown (3.474) for type of enterprise is not significant for DF=4,
(3.450) for age of promoter is not significant for DF=8, (8.661) for qualification of promoter is
not significant for DF=8 and (18.128) for experience of promoter is not significant for DF=12.
From the trend of response obtained from promoters on approach of the government on
responsiveness of commercial banks towards financing of startup is uniform. It is observed that
promoters are strongly disagreed on approach of the government on responsiveness of
commercial banks towards financing of startup. From the rating obtained from promoters it is
observed that 66 % disagree and 37.75 % strongly disagree that commercial bank are responsive
towards financing of startups except promoters having experience of above 10 years are neutral
on the issue.
 It is observed that according to type of enterprises, age, qualification and experience on bank loan
as source of fund for raising credit for a startup, the Pearson chi square values shown (3.290) for
type of enterprise is not significant for DF=4, (7.433) for age of promoter is not significant for
DF=8, (15.250) for qualification of promoter is not significant for DF=8 and (22.350) for
experience of promoter is not significant for DF=12. The trend of response obtained from
promoters on bank loan is uniform. From the rating obtained from promoters it is observed that
33.16 % agree and 11.66 % Strongly Agree that bank loan is the last choice for of finance for
# #

startup.

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VI. Conclusion

Many startup enterprises wish to avail bank loan in fact large number of startup
enterprises see bank loan as a long term source of finance for their business. But in reality
only a very small number are successful in getting bank loan successfully. The startup
entrepreneurs face many problems in availing bank loan and after trying it for number of
times they go for other source of finance. In the current scenario many startup
entrepreneurs do not consider bank loan as a source of finance. Although government is
taking many steps to provide adequate finance to startup entrepreneurs and for the same
cause many schemes are also lunched too by the government but the out is still
questionable. It is the duty of the government is to not only lunch schemes but also make
it sure that the schemes are implemented successfully at the grass root level and see that
the scheme reaches to the maximum.

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