A Comprehensive Guide to Small Business Funding in India

Table of Contents

• Overview of Funding for Small Businesses in India
• Top Ways to Raise Funds for a Small Business
  • Government Schemes & Initiatives
  • Loans from Banks/NBFCs
  • Angel Investors
  • Venture Capitalists
  • Crowdfunding
  • Peer-to-Peer (P2P) Lending
  • Revenue-Based Financing

Overview of Funding for Small Businesses in India

Small businesses turn the wheels of the Indian economy, promoting employment generation, industrial production, exports, innovation and entrepreneurship. Micro, Small, & Medium Enterprises or MSMEs have gone a long way in fostering entrepreneurship and bringing remote and rural regions into the fold. The MSME sector employs over 25 crore individuals with 5.93 crore registered business units. It also accounts for around 30% of the national GDP. Financing is among the primary concerns for owners looking to start or expand a small business. Without suitable capital, you cannot even start the ball rolling, forget growth or success. Lack of financial opportunities is a thing of the past. Finance has become more accessible with a variety of funding options available in the market. Selecting a suitable funding option demands careful planning and research, including business type, capital need and funding terms.

Top Ways to Raise Funds for a Small Business

Diverse funding options are available for small businesses in India, ranging from bank loans and private equity financing to government-backed schemes. Let's take a look at how to get funding for a business.

Government Schemes & Initiatives

The government recognizes the role of small businesses to drive economic growth and innovation. Thus, it offers several support measures to help propel small businesses towards success. Every government scheme comes with a distinct set of objectives, benefits, eligibility criteria and application process. In some cases, the government also offers training and mentorship in addition to funds. Some of the key benefits of government support include lower interest rates, simplified compliance, business credibility and tax & financial incentives. Below are the key government schemes for small businesses:

• Pradhan Mantri Mudra Yojana (PMMY): Offers collateral-free Mudra loan up to Rs. 50,000 (Shishu), Rs. 5,00,000 (Kishore), Rs.10,00,000 (Tarun) and Rs.20,00,000 (Tarun Plus).
• Stand-Up India: Offers loans between Rs. 10 lakhs and Rs. 1 crore to at least a single SC or ST borrower and at least a single woman borrower for every bank branch to set up a greenfield enterprise.
• National Small Industries Corporation (NSIC): An ISO 9001:2015 certified enterprise for aiding, promoting and fostering the growth of MSMEs through integrated support services covering services like finance, technology and marketing.
• Special Credit Linked Capital Subsidy Scheme (SCLCSS): SC/ST MSEs get a 25% subsidy with a ceiling of Rs. 25 lakhs on bank loans to procure Plant & Machinery/ Equipment.
• Startup India Seed Fund Scheme (SISFS): Offers up to Rs. 20 lakhs for prototype development, product trials or validating Proof of Concept. Also, grants up to Rs. 50 lakhs for investing in market entry/commercialization/scaling up.
• Credit Guarantee Fund Trust for Micro & Small Enterprises (CGTMSE): Offers credit guarantees for credit support of up to Rs. 10 crores to MSEs, extended by Member Lending Institutions (MLIs).

Loans from Banks/NBFCs

Securing funds through bank loans is the traditional approach to starting a business. Bank loans offer immediate access to funds that can be used for managing cash flow, buying equipment or expansion. Flexible repayment tenures, tax incentives and competitive interest rates are some key benefits of bank loans. In addition, owners get to keep complete ownership of the business. Flexible loan amounts help meet specific needs, ranging from managing work capital to funding expansion.

NBFCs have emerged as a leading choice for small business loans in India. This is mainly due to their faster loan approval, disbursal, flexible eligibility criteria, easy application process and customized solutions. Application is easy and smooth due to minimal documentation. Also, NBFCs offer tailored small business funding options for individuals with a lack of financial history or a lower credit score.

Angel Investors

Getting a small business loan may not be a simple task for everyone. But that doesn’t mean your dream of a successful business ends here. Angel investors are generally high-net-worth individuals who offer financial backing to entrepreneurs and small-business owners at an early stage. They invest in small businesses with seed money, usually in exchange for equity. In addition to funds, these investors come with industry expertise, increased credibility, expert mentorship and networking opportunities. It helps early-stage companies to grow their business without worrying about debt repayments. Angel investing shows trust in the small business, which acts as a catalyst for its growth.

Venture Capitalists

Venture Capitalists (VCs) involve private equity investors or firms that provide funds to businesses with high growth potential. They take equity ownership in exchange for financial support. Contrary to angel investors, VCs do not invest personal funds but pool capital from high-net-worth individuals, institutional investors, and corporations. VCs actively look for businesses that have potential for huge, scalable growth. A small business can use the strategic guidance offered by VCs and their networks to grow much faster in the right direction. These funds are highly valuable for scaling operations, developing products or entering new markets. However, VCs can take a significant, active role in the business, which may be a restricting factor for some owners.

Crowdfunding

Crowdfunding pools small amounts from a large number of individuals to raise capital for businesses. Generally, it involves an online platform that provides direct access to diverse investors. There is no issue of repayments or equity loss as contributors are generally offered rewards by the business, including early product access. However, there is also an option for equity-based crowdfunding. Crowdfunding is a valuable approach for determining market interest in the product before actual entry into the market. Along with this, it helps develop a loyal community of customers. This low-risk, cost-effective funding option is beneficial for small businesses to secure funds without collateral.

Peer-to-Peer (P2P) Lending

P2P lending directly connects individual business owners with individual investors without intermediaries like traditional banks or NBFCs. For instance, a salaried employee in Delhi with savings can fund a business in Kolkata with capital needs. Generally, borrowers enjoy lower interest rates while the lenders have the opportunity to earn greater returns. The main benefits of P2P lending include easy access, speedy decision-making, flexibility and competitive pricing. It is mainly done through an online platform, which offers transparency and flexibility for both borrowers and investors. Investors can see valuable information about borrowers, including their creditworthiness, to determine where to invest.

Revenue-Based Financing

Revenue-based financing, or RBF, provides funds to a business from an investor who is promised a percentage of its future revenue. There is no need to compromise equity for funds. Also, repayment is guaranteed up to a certain threshold. When the entire amount has been repaid, this arrangement is ended completely. RBF is ideal for businesses with a regular flow of revenue and no intention of equity dilution or raising debt. In some cases, adjustments can be made to repayment rates for low-revenue situations.

Small businesses have a variety of options for securing funds in India. Gone are the days when starting a business was just an unrealizable goal for many. From bank loans to alternative options like RBF and P2P lending, you can choose any funding method that matches your business requirements. However, it is important to evaluate all the pros and cons of the selected funding approach to ensure a successful business. Use due diligence and thorough research for business funding for a small business and fuel your business growth.