BusinessMoney for your business
How to raise money for a small business
There are more ways to fund a business than a bank loan, and the cheapest ones come first. This page sets them out in the order to try them, shows which suit which kind of business, and lists the 10 loans and schemes we have looked into.
Before you borrow
- Know the amount. Add up machines, deposit, licences, first stock and three months of running costs. Each business page on this site does this for you.
- Borrow for things that earn. Machines and stock pay a loan back. Furniture, a signboard and a big opening do not.
- Match the loan to the need. A term loan for machines, repaid over years. A running limit for stock, repaid as you sell.
- Check the instalment against a bad month, not a good one. If a slow month cannot pay the EMI, the loan is too big.
The ways to raise money, cheapest first
Start at the top. Move down only for what the steps above cannot cover.
1Your own savings
Money you already have, including what you can save over a few months before starting.
Good: No interest, no forms, and every lender wants to see some of it in the business.
Watch: Do not put in the family's emergency money.
2Family and friends
An interest-free or low-interest loan from people who know you.
Good: Flexible and quick.
Watch: Write down the amount and the date you will return it. Unclear terms spoil relationships.
3Customers' advances
Taking part payment before you deliver: tiffin subscriptions, tuition fees, tailoring and catering orders.
Good: The customer funds your stock. No cost at all.
Watch: You must deliver. Keep the advance apart from your own money until you have.
4Supplier credit
Buying stock or raw material and paying the supplier after 15 to 30 days.
Good: Works like an interest-free loan once a supplier trusts you.
Watch: Pay on the promised day. One missed payment ends it.
A women's group saves together, receives funds under the livelihoods mission and bank loans without collateral, and lends to its members.
Good: Low cost, close to home, and open to women with no credit history.
Watch: The money belongs to the group. It suits small amounts.
PM SVANidhi: small working-capital loans in three rising steps.
Good: Made for hawkers and cart vendors; needs no collateral.
Watch: Only for street vendors in towns, and the amounts are small.
PM Vishwakarma: training stipend, tool money and two low-interest loans.
Good: The lowest interest on this list for carpenters, tailors, barbers and other listed trades.
Watch: Only for the listed traditional trades.
A bank loan for a micro business with no collateral, up to ₹20 lakh.
Good: The standard first bank loan. No subsidy, but the simplest to get.
Watch: The bank still judges your plan and your credit record.
PMEGP, or a state scheme such as Maharashtra's CMEGP: a bank loan where the government pays 15–35% of the project cost.
Good: The subsidy sharply cuts what you repay. Higher for women, SC, ST and rural units.
Watch: Only for new units, takes months, and depends on the scheme being open that year.
10Bank term loan with a guarantee
An ordinary business loan where a government-backed trust (CGTMSE) guarantees the bank, so you need not pledge property.
Good: For larger amounts when you have a sound plan but no collateral.
Watch: A guarantee fee is added to your cost.
11Cash credit or overdraft
A running limit from your bank for stock and for money customers owe you. You pay interest only on what you use.
Good: The right tool for working capital once the business is running.
Watch: It is renewed yearly and can be reduced. Do not use it to buy machines.
12Machinery finance
A loan or hire-purchase from a bank, an NBFC or the machine supplier's finance partner, secured on the machine itself.
Good: The machine is the security.
Watch: Compare the total cost with a bank term loan. Supplier finance is often dearer.
Borrowing against the family's gold ornaments.
Good: Money in a day, with no income proof.
Watch: If you cannot repay, the gold is auctioned. Use it for short needs only.
14Loan against property or a fixed deposit
A larger loan secured on a house, shop, land or your own deposit.
Good: Lower interest than unsecured loans.
Watch: You are staking the family's home on the business.
A small group loan without collateral from a microfinance company or small finance bank.
Good: Available to households that banks turn away.
Watch: Interest is high. Use it only for stock that sells within weeks.
16A partner
Someone who puts in money, and usually work, for a share of the profit.
Good: No repayment, and a second pair of hands.
Watch: Write a partnership deed: shares, duties, salary, and how either of you can leave.
17Investors
Angel investors and venture funds who buy a share of a company that could grow very large.
Good: Large sums with nothing to repay.
Watch: Only for businesses that can multiply in size, registered as a company. Not for a shop, a workshop or a food unit.
Which way suits which business
Work from home with almost no equipment
Tuition, tailoring, mehendi, pickle and papad on a small scale
Use: Own savings, customers' advances, a self-help group. A loan is usually not needed.
Avoid: Any loan to buy a 'business kit' or to join a scheme.
Street vending and carts
Vegetables, snacks, tea, juice, garments on a cart
Use: PM SVANidhi for stock, supplier credit from the wholesale market.
Avoid: Daily-collection moneylenders.
A skilled trade
Carpenter, tailor, barber, cobbler, mason, repair work
Use: PM Vishwakarma if your trade is listed, otherwise a small Mudra loan for tools.
Avoid: Buying costly machines before you have steady orders.
A shop or trading business
Kirana, stationery, footwear, electrical goods, medical store
Use: Own money for the deposit and fit-out, Mudra for the first stock, supplier credit, then a cash-credit limit once sales are steady.
Avoid: Funding stock with a personal loan or credit card.
A small manufacturing unit
Flour mill, paper plates, bakery, oil mill, fly ash bricks
Use: PMEGP or your state scheme for the subsidy, with a term loan for machines and cash credit for raw material. CGTMSE cover if you have no collateral.
Avoid: Paying a supplier in full before delivery, and 'buy-back guarantee' machine sellers.
A service business with equipment
Beauty parlour, gym, car wash, photo studio, repair centre
Use: Mudra or PMEGP (service units have a lower project limit), and machinery finance for single costly items.
Avoid: Signing a long lease before the loan is sanctioned.
Farming and livestock
Dairy, goats, poultry, mushrooms, fish
Use: A Kisan Credit Card for crop and animal husbandry working capital, and subsidy schemes of the animal husbandry and fisheries departments where they apply.
Avoid: Assuming a subsidy before you have the sanction letter. On our numbers most small livestock units struggle to repay a loan without one.
A business meant to grow very large
Software products, apps, new technology
Use: Founders' own money first, then grants and seed schemes for recognised startups, then angel investors.
Avoid: Giving away a large share for a small sum, and anyone who charges a fee to 'arrange' investors.
All loans and schemes
- Mudra loanAny micro business; no collateralloan
- PMEGPNew manufacturing and service unitsloan with subsidy
- PM SVANidhiStreet vendors and hawkers in townsloan
- PM VishwakarmaPeople working with their hands in 18 traditional tradesloan with subsidy
- CMEGP (Maharashtra)Residents of Maharashtra starting a new unitloan with subsidy
- Stand-Up IndiaSC, ST and women starting a new enterprise of some sizeloan
- CGTMSE guaranteeAny micro or small enterprise that has no property to pledgeguarantee
- Self-help group creditWomen in rural self-help groupsgroup credit
- Microfinance loanLow-income households with no collateralloan
- Gold loanAnyone with gold ornaments who needs money quicklysecured loan
Other schemes exist, including state schemes outside Maharashtra and those of the SC, ST, OBC and minority finance corporations. Ask your District Industries Centre which apply to you.
Type of business registration, and what it means for money
How your business is registered decides who can fund it. Most small businesses should start as a proprietorship and change only when there is a reason to.
Proprietorship
One owner. No separate registration of the business itself; Udyam, GST and a shop licence in your name are what make it visible.
Raising money: Fine for Mudra, PMEGP, state schemes and cash credit. Lenders look at you personally.
Keep in mind: You are personally liable for every debt. Cannot take in investors.
Partnership firm
Two or more people under a partnership deed, ideally registered.
Raising money: Banks lend to it like a proprietorship and look at every partner.
Keep in mind: Each partner is liable for the whole of the firm's debts.
Limited Liability Partnership (LLP)
Partners with liability limited to what they put in, registered with the Ministry of Corporate Affairs.
Raising money: Banks lend to it; outside investors usually prefer a company.
Keep in mind: Yearly filings are compulsory even with no business.
One Person Company
A company with a single owner and a nominee.
Raising money: Looks more formal to banks and large customers than a proprietorship.
Keep in mind: Company-style compliance for one person's business.
Private limited company
Two or more shareholders, with shares that can be issued to new people.
Raising money: The form investors need, because they can be given shares. Banks lend to it and usually still ask for the directors' personal guarantee.
Keep in mind: The most paperwork and cost. Not needed for a shop, a workshop or a home business.
Registration fees, filing rules and tax treatment differ for each form and change. Ask a chartered accountant before choosing anything other than a proprietorship.
What a bank checks
- Your credit record. Missed EMIs or credit card dues, even small ones, are the most common reason for refusal. Check your credit report first.
- A project report with real quotations for machines. You can make one free on any business page here.
- Your own contribution, shown in your bank account.
- Udyam registration, which is free, and the licences the business needs.
- Bank statements for the last six to twelve months, and income tax returns if you file them.
- The place of business: a rent agreement or ownership papers. The officer will visit.
- Experience or training in the trade. A short course certificate helps a first-time owner.
Money to stay away from
- Advance-fee loans. Anyone who asks for a processing fee, insurance or “GST” before releasing a loan is a fraud.
- Instant loan apps that are not from a bank or a registered NBFC. They charge heavily and harass borrowers and their contacts.
- Daily-collection moneylenders. A small daily amount hides a very high yearly rate.
- Personal loans and credit cards for machines or stock. They cost far more than a business loan.
- Agents who promise a subsidy for a commission. Subsidy schemes are applied for on government portals, free.
- Borrowing to trade in shares or to join a network scheme. Read our pages on day trading and network marketing.
Where to ask
| Ask | Where to ask |
|---|---|
| Which subsidy schemes are open in my district this year? | District Industries Centre, or the KVIC and state scheme portals |
| Which bank branch handles government-scheme loans here? | The Lead District Manager's office, or the branch where you hold an account |
| Is this lender or loan app registered? | The Reserve Bank of India's lists of banks and NBFCs on rbi.org.in |
| What is on my credit report? | Any of the credit bureaus; one free report a year from each |
| Which registration suits my business? | A chartered accountant |
Questions people ask
Which loan is best for starting a small business?+
For a new manufacturing or service unit, try a subsidy scheme first: PMEGP or your state's scheme, where 15–35% of the project cost is paid by the government. If you only need a small amount, or the unit is not new, a Mudra loan of up to ₹20 lakh without collateral is simpler. Street vendors and traditional artisans have their own schemes.
Can I get a business loan with no collateral?+
Yes. Mudra loans up to ₹20 lakh, PM SVANidhi and PM Vishwakarma loans are collateral-free, and larger loans can be covered by the CGTMSE guarantee in place of property. The bank will still look at your project, your own contribution and your credit record.
How much of my own money do I need?+
Usually some. Under PMEGP it is 5% of the project cost for special categories and 10% for others. For other loans the bank decides, and showing your own money in the business makes approval far more likely.
Should I register a company to get a loan?+
No. Banks lend to proprietorships every day, and nearly all small businesses start as one. A private limited company is needed only when you plan to take in outside investors.
Someone has offered a quick loan if I pay a processing fee first. Is it genuine?+
Treat it as a fraud. Banks and registered lenders deduct charges from the loan when it is paid out. They do not ask for money in advance to a personal account or by UPI.
This page is a general guide, not financial advice. Scheme terms change by government order and differ between banks. Confirm with your bank, the scheme office and a chartered accountant before you borrow.