Starting a small business in India comes with numerous opportunities and challenges. But business funding can increase the chances of success and security.

Even launching a tech startup or expanding a manufacturing unit, both can be difficult if you don’t understand your funding options. The one who can understand the funding options can make the difference in building and scaling startups.

In this KOFFi Break, this guide gives you information about various small business funding options available in India in 2025.

Types of Small Business Funding

Small business funding in India is categorized into several types, each serving different business needs and growth stages. Here’s the list of small business funding options:

Debt Financing:

• • • It is the traditional form of funding where businesses borrow money that must be repaid with interest.
    • It includes bank loans, term loans, working capital loans, and equipment financing. The main advantage of debt financing is that you can retain complete ownership of your business, but you’ll need to pay the debt regardless of your business performance.

Equity Financing:

• • • It involves selling a portion of your business ownership in exchange for capital.
    • This includes angel investors, venture capital, and equity crowdfunding. While you don’t have to repay the money, you’ll share profits and decision-making with investors.

       

Hybrid Financing:

1. 1. • It combines elements of both debt and equity, such as convertible bonds or revenue-based financing.
      • These instruments offer flexibility but can be more complex to structure and understand.

         

Grant Funding:

1. • It involves receiving non-repayable funds from government bodies or organizations.
   • While competitive and often restricted to specific sectors or demographics, grants represent the most attractive funding option when available.

Each type of funding comes with distinct advantages, requirements, and implications for your business operations and future growth plans.

Government Grants & Schemes for Small Businesses

The Indian government has launched numerous initiatives to support small business growth, making government funding one of the most attractive options for entrepreneurs. These schemes often come with favorable terms and don’t require equity dilution.

Pradhan Mantri Mudra Yojana (PMMY):

1. 1. • It remains one of the most popular schemes, offering loans up to ₹10 lakhs without collateral.
      • The scheme is divided into three categories: Shishu (up to ₹50,000), Kishore (₹50,000 to ₹5 lakhs), and Tarun (₹5 lakhs to ₹10 lakhs). Over 40 crore loans have been sanctioned under this scheme since its inception.

         

Stand-Up India Scheme:

1. 1. • It specifically targets SC/ST and women entrepreneurs, providing loans between ₹10 lakhs and ₹1 crore for setting up greenfield enterprises.
      • This initiative has been particularly successful in promoting entrepreneurship among underrepresented communities.

         

Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE):

1. 1. • It provides collateral-free credit facilities up to ₹2 crores for micro and small enterprises.
      • This scheme has been instrumental in addressing the collateral challenge that many small businesses face when approaching traditional lenders.

         

Startup India Seed Fund Scheme:

1. • It offers funding up to ₹50 lakhs for startups in their early stages.
   • The scheme provides both grants and loans, with grants going up to ₹20 lakhs for proof of concept and ₹50 lakhs for prototype development.

Regional and state governments also offer various sector-specific schemes. For instance, many states have special provisions for textile, agriculture, and technology businesses. These schemes often provide additional benefits like subsidized interest rates, tax exemptions, and simplified compliance procedures.

Equity Financing Options

Equity financing has gained significant traction in India’s entrepreneurial ecosystem, particularly with the success stories of companies like Flipkart, Paytm, and Zomato. This funding method involves selling ownership stakes to investors in exchange for capital.

1. Angel Investors are typically high-net-worth individuals who invest their personal funds in early-stage businesses. India has seen a surge in angel investor networks like Indian Angel Network, Chennai Angels, and Mumbai Angels. These investors not only provide capital but also bring valuable mentorship and industry connections. Angel funding typically ranges from ₹25 lakhs to ₹2 crores.

    

2. Venture Capital firms invest larger amounts in businesses with high growth potential. Prominent VC firms in India include Sequoia Capital, Accel Partners, and Kalaari Capital. VC funding usually starts from ₹5 crores and can go up to hundreds of crores for later-stage rounds. However, VCs typically look for businesses with scalable models and potential for significant returns.

    

3. Equity Crowdfunding platforms like LetsVenture and Fundlined allow businesses to raise money from multiple small investors. This option has become increasingly popular for consumer-facing businesses that can effectively communicate their value proposition to retail investors.

When considering equity financing, remember that you’re not just getting money but also partners who will have a say in your business decisions. Choose investors who align with your vision and can add value beyond just capital.

Revenue Based Financing

Revenue-Based Financing is a flexible funding option where businesses raise money and repay it as a small percentage of their future monthly revenue. There are no fixed EMIs. When your revenue is high, you repay more. When it’s low, you repay less. This makes it easier for businesses to manage cash flow without the pressure of a fixed repayment schedule.

It’s a good fit for businesses that have consistent revenue but may not have assets for collateral. You don’t give up equity, so you keep full ownership. That’s why many digital-first businesses, D2C brands, and SaaS companies prefer this model.

In India, platforms like Klub, Velocity, GetVantage, and Recur Club are popular RBF providers. They typically offer quick disbursals and don’t need personal guarantees or heavy paperwork.

If you want to grow your business without giving away equity or taking on rigid loan terms, RBF is worth exploring.

Trade Financing options

Trade financing helps businesses manage working capital needs tied to day-to-day transactions like buying raw materials or waiting for customer payments. It gives you quicker access to funds without taking on long-term debt.

Invoice Discounting:

• You raise a bill for a customer but need cash before they pay. In invoice discounting, a lender gives you up to 80–90% of the invoice value immediately. 
• When the customer pays later, the lender deducts their fee and gives you the balance. This helps you manage cash flow without waiting for collections.

   

Supply Chain Financing:

1. 1. • This works when a large buyer agrees to pay your invoice, but after 30–60 days. Instead of waiting, a bank or fintech pays you early, based on the buyer’s credit rating. 
      • Once the due date comes, the buyer pays the financier. It helps small suppliers get faster access to funds.

         

Letter of Credit (LC): 

1. • Used in import-export deals, an LC is issued by the buyer’s bank to guarantee payment to the seller. Once the seller ships goods and provides proof (like a bill of lading), the bank releases payment. 
   • It reduces risk for both sides and builds trust in large transactions.

These tools make trade smoother and reduce the pressure of delayed payments — especially useful for manufacturers, exporters, or suppliers working on tight margins.

Debt Financing Options

Debt financing remains the backbone of small business funding in India, offering entrepreneurs the ability to retain full ownership while accessing necessary capital. The landscape has evolved significantly with the entry of fintech companies and alternative lending platforms.

Traditional Bank Loans:

1. 1. • It continues to be a primary source of funding. Public sector banks like State Bank of India, Bank of Baroda, and private banks like HDFC Bank and ICICI Bank offer various loan products for small businesses.
      • Term loans for long-term investments, working capital loans for daily operations, and equipment financing for machinery purchases are the most common options. Interest rates typically range from 9% to 15% depending on the business profile and collateral.

         

Non-Banking Financial Companies (NBFCs):

1. 1. • It has emerged as a significant player in small business lending. Companies like Bajaj Finance, Tata Capital, and L&T Finance offer more flexible terms and faster processing compared to traditional banks.
      • While interest rates may be slightly higher, the ease of documentation and quicker disbursement make NBFCs attractive for many entrepreneurs.

         

Fintech Lending Platforms:

1. 1. • It has revolutionized small business funding with technology-driven solutions. Platforms like Capital Float, Lendingkart, and IndiFi use alternative credit scoring methods to evaluate businesses, making funding accessible to ventures that might not qualify for traditional bank loans.
      • These platforms often provide unsecured loans ranging from ₹1 lakh to ₹1 crore with minimal documentation.

         

Peer-to-Peer Lending platforms:

1. • It connects businesses directly with individual lenders, often offering competitive rates. However, this option is still evolving in India with regulatory frameworks being developed.

Choosing the Right Funding Option

Consider these key factors when selecting funding:

• Funding amount needed: For funding under ₹10 lakhs, try MUDRA or fintech loans. For funding above ₹50 lakhs, try bank loans; for funding above crores, go for equity investors.

   

• Control preference: If maintaining 100% ownership and decision-making control is crucial for you, debt financing through loans is the way to go, even though you’ll need to service regular EMIs.

   

• Business stage: New ventures without established revenue streams should focus on government grants like Startup India Seed Fund or angel investors who are willing to bet on ideas and potential. Established businesses with consistent cash flows and proven track records will find it easier to secure bank loans at competitive rates.

   

• Timeline urgency: When you need funds within days or weeks, fintech lending platforms can process applications quickly using digital documentation. If you can afford to wait 3-6 months for funding, government schemes and venture capital offer better terms and larger amounts, though with longer approval processes.

Tips to Improve Funding Chances

• Maintain clean financial records: Use accounting software, file GST returns on time, keep proper invoices
• Create a simple business plan: Explain what you do, target customers, and revenue model in plain language
• Build credit history: Start with small loans and repay on time to establish credibility
• Show market demand: Gather customer testimonials, advance orders, or proof that people want your product
• Network actively: Attend entrepreneur meetups – many opportunities come through referrals
• Organize documents: Keep company registration, tax returns, bank statements ready for quick responses

Final Thought

There are various opportunities for entrepreneurs going for small business funding in India. From traditional bank loans to innovative fintech solutions and government schemes, there are numerous pathways to secure the capital you need.

Success lies in understanding your specific business needs, honestly assessing your financial situation, and choosing funding sources that align with your goals. Remember that funding isn’t just about money, it’s about finding the right partners and resources for your business success.

Take time to research thoroughly, prepare meticulously, and approach the process strategically. With proper preparation and the right approach, the funding you need to transform your business vision into reality is within reach.