Beyond Bank Loans
The default answer to a funding need in India is still the bank term loan, and for good reason: it is the cheapest money most SMEs will ever access.
The problem is not that banks are a bad option. It is that they are a narrow one.
A bank underwrites collateral and history, which leaves out the company with strong receivables but no property to pledge, the manufacturer whose new capacity will not generate cash for eighteen months, and the growing business whose credit need arrived faster than its balance sheet.
SME fundraising has widened considerably in the last few years, and Budget 2026-27 widened it again.
What follows are ten routes worth knowing, roughly ordered from the most accessible to the most demanding.
Government-Backed Credit, Where Collateral Is the Obstacle
1. Credit Guarantee Cover Under CGTMSE
In SME fundraising terms, where a business is bankable but cannot pledge security, the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) stands behind the lender instead.
The guarantee cover has been raised to Rs 10 crore, which moves the scheme from a micro-loan tool to something that can support real plant and machinery purchases.
The loan still comes from a bank or NBFC on commercial terms. What changes is that the absence of collateral stops being fatal.
2. MUDRA Loans for Smaller Requirements
The Pradhan Mantri Mudra Yojana covers:
| Category | Loan Size |
| Shishu | Up to Rs 50,000 |
| Kishore | Up to Rs 5 lakh |
| Tarun | Up to Rs 10 lakh |
| Tarun Plus | Up to Rs 20 lakh |
Tarun Plus is available to borrowers who have repaid a previous Tarun loan.
Ticket sizes are modest, so this route suits early requirements and working capital rather than major expansion.
Turning Receivables and Orders Into Cash
3. Invoice Discounting Through TReDS
The Trade Receivables Discounting System (TReDS) is an RBI-regulated platform where a supplier uploads an approved invoice, multiple financiers bid against it, and funds typically arrive within a day or two.
The appeal is practical:
- Financiers compete on pricing.
- Credit is assessed primarily against the buyer.
- The SME does not have to wait for the buyer’s full payment cycle.
- Funding does not depend on the SME’s own collateral position.
Budget 2026-27 strengthened this further. Onboarding is now mandatory for Central Public Sector Enterprises, the system is integrated with the GeM procurement portal, and CGTMSE guarantee support has been extended to invoice discounting on the platform.
More than Rs 7 lakh crore has been made available to MSMEs through TReDS to date.
4. Supply Chain and Vendor Financing
Where a company sells to a large anchor buyer outside the TReDS route, or buys from suppliers on tight terms, financiers can fund against the strength of the counterparty relationship.
The logic mirrors invoice discounting: the credit rests on the larger party in the chain, not solely on the SME’s own balance sheet.
This can be particularly useful where the underlying commercial relationship is strong but the SME itself has limited borrowing history or collateral.
Faster, Costlier Money From Non-Bank Lenders
5. NBFC and Digital Lending
This is the fastest-growing part of SME fundraising.
Non-banking financial companies and digital platforms underwrite on cash-flow data, GST filings and banking history rather than property. Disbursal is quick, often within days, and documentation is lighter.
The trade-off is straightforward. The founder is exchanging cost for speed and access: interest rates sit above bank pricing, but the route can make sense when timing matters more than achieving the lowest possible cost of capital.
6. Revenue-Based Financing
Repayment is a share of monthly revenue, commonly in the range of 5 to 10 per cent, over terms of roughly six months to two years, priced as a flat fee rather than compounding interest.
Because repayment moves with sales, a slow quarter does not create the same strain as a fixed instalment.
This makes it better suited to digitally native businesses with predictable online income and less suitable for businesses with lumpy, project-based work.
Instruments That Fund Growth Without Selling Equity
7. Venture Debt
Venture debt is a term loan for companies that have already raised institutional equity.
Typical terms are around 12 to 36 months at 12 to 18 per cent, with a small warrant attached. It is generally used to extend runway between equity rounds rather than fund an unproven business model.
8. Non-Convertible Debentures
A non-convertible debenture (NCD) is a fixed-coupon debt security with a trustee holding security for lenders, and remains a workhorse of Indian private credit.
A privately placed NCD to a credit fund carries a higher coupon than a bank loan, reflecting the risk taken.
One structural limitation matters: a limited liability partnership cannot issue NCDs, so the business must be a company first.
9. Structured Credit From AIFs
Where repayment needs to be shaped around the business rather than the calendar, SEBI-registered Alternative Investment Funds (AIFs) can build a facility around the company’s cash flows.
Possible structures include:
- Bullet repayment at maturity
- Stepped coupons
- Blended senior and mezzanine tranches
- Repayment linked to defined cash-flow events
This can suit a capacity expansion where the new cash flows arrive well after the initial spending.
Choosing between venture debt, an NCD and a structured facility is a decision in its own right, and one Lorvet spends considerable time on with founders.
Selling Equity, When That Is Genuinely the Right Answer
10. Equity, From Angels Through to a Public Listing
Angel and venture investment, private equity, and eventually an SME IPO all involve selling ownership rather than borrowing.
The state has added to this end of the market as well, with a Rs 10,000 crore SME Growth Fund announced in Budget 2026-27 alongside a Rs 2,000 crore addition to the Self-Reliant India Fund.
Equity is the right instrument where:
- The requirement is genuinely long term.
- Losses are expected before profits.
- The business cannot reliably service fixed repayments.
- An investor brings market access the company cannot simply buy.
It is the wrong instrument for a profitable business funding a predictable expansion, because the cost is permanent.
The Catch Worth Stating Plainly
A wider choice in SME fundraising is not the same thing as cheaper money.
Every route above except a grant carries a cost, and the non-bank options cost more than the bank loan a founder may have been declined for.
There are several risks to consider:
- Debt has to be serviced whether or not the quarter goes to plan.
- Covenants can restrict how a company operates.
- Security usually means a charge over assets.
- Multiple facilities can create overlapping repayment obligations.
The genuine risk in a widening market, and one Lorvet sees regularly, is a business assembling several small facilities at high rates and finding its cash flow committed before growth arrives.
The discipline that matters is therefore not simply knowing the menu. It is knowing how much to raise, at what price, and against which specific return.
Deciding What the Money Is Actually For
The useful question is not: which fundraising option is best?
It is: which option is best for this particular need?
| Funding Need | Potential Route |
| Receivables tied up with a large buyer | TReDS |
| Collateral gap on an otherwise bankable proposal | CGTMSE-backed lending |
| Smaller early-stage requirement | MUDRA |
| Fast access to working capital | NBFC / digital lending |
| Predictable digital revenue | Revenue-based financing |
| Runway between equity rounds | Venture debt |
| Predictable cash flows | NCD |
| Back-ended capex cycle | Structured credit |
| Long-term capital requirement | Equity |
| Growth requiring strategic investors | Equity / private capital |
Terms and scheme limits shift quickly here, so any decision should rest on current numbers rather than last year’s assumptions. Approached that way, SME fundraising stops being a search for whoever will say yes. It becomes a deliberate choice about the shape of the company’s balance sheet.
That is the conversation Lorvet would rather have with a founder before the need becomes urgent.
Frequently Asked Questions
- What are the main fundraising options available to Indian SMEs besides bank loans?
SME fundraising now covers government-backed credit guarantees, MUDRA loans, invoice discounting through TReDS, supply-chain financing, NBFC and digital lending, revenue-based financing, venture debt, non-convertible debentures, structured credit from AIFs, and equity. The right one depends on the purpose of the money and the company’s cash-flow profile.
- Which option suits an SME with receivables but no working capital?
TReDS-based invoice discounting, where the SME holds approved invoices from established buyers and financiers compete to fund them. Supply-chain or vendor financing can also work where a larger counterparty supports the arrangement.
- Is non-bank financing more expensive than a bank loan?
Generally yes, because non-bank lenders take greater risk and offer faster access with lighter documentation. The trade is higher cost in exchange for speed, flexibility, or capital a bank would decline.
- When should an SME consider equity instead of debt?
Where the requirement is genuinely long term, losses are expected before profitability, or an investor brings strategic value such as market access. Debt suits a profitable business with predictable cash flows and a defined expansion that can support repayment.
- How should an SME decide which route is right?
Start with what the money is actually for rather than which lender will say yes. Receivables point towards TReDS, a collateral gap towards CGTMSE-backed lending, interim runway towards venture debt, and a genuinely long-term requirement towards equity.
