DEBT BASED FUNDING

Debt-based funding refers to a method of raising capital where a company borrows money that must be repaid over time, typically with interest. Unlike equity financing — where ownership stakes are offered to investors — debt financing allows businesses to raise funds without diluting ownership.

Debt-based funding is a preferred option for businesses that have predictable cash flows and seek to retain full control over their operations.

Key Features of Debt-Based Funding

• Repayment Obligation: The borrowed amount (principal) must be repaid within a stipulated time frame along with agreed-upon interest.

• No Ownership Dilution: Since lenders do not receive equity, founders maintain complete ownership and control over the company.

• Fixed Costs: Regular repayment schedules (monthly, quarterly, or annually) create predictable financial obligations.

• Collateral Requirements: Some forms of debt require assets as security (secured loans), while others may be unsecured based on the borrower's creditworthiness.

• Interest Rates: Rates depend on the borrower's credit rating, loan amount, loan type, and prevailing market conditions.

Common Types of Debt Based Funding

CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises) - Working Capital Loan

The CGTMSE scheme, launched by the Government of India and SIDBI in 2000, offers credit guarantees to encourage banks and financial institutions to lend to micro and small enterprises (MSEs). It provides a safety net that boosts entrepreneurship and reduces financial barriers for small businesses.

Key Features:

• Loan Coverage: Up to ₹500 lakh for term and working capital loans.

• Guarantee Coverage: 75%–85% of the loan (50% for retail activities).

Benefits:

• • Increased coverage limit from ₹200 lakh to ₹500 lakh.

  • Reduced guarantee fees (as low as 0.37%).

  • Special concessions for SC/ST entrepreneurs, women, ZED-certified units, and businesses in aspirational districts.

Eligible Lending Institutions:
Scheduled Commercial Banks, Regional Rural Banks, Small Finance Banks, NBFCs, SIDBI, NSIC, NEDFi.

Eligibility:

• Indian citizens aged 18 years and above.

• New or existing micro and small enterprises engaged in manufacturing, services, or trading under the MSMED Act, 2006.

• Credit facilities availed from enlisted institutions under CGTMSE.

2. MSME Loan (via PSB59 Portal)

The MSME loan scheme offers fast-track digital loan approvals for Micro, Small, and Medium Enterprises (MSMEs) through the PSB59 platform, helping businesses access financing within just 59 minutes.

Key Features:

• Loan Amount: ₹10 lakh to ₹5 crore.

• Interest Rates: Starting at 8.5% per annum.

Benefits:

• • Simplified single-application process.

  • Seamless integration with GST, ITR, and bank data.

  • Flexible repayment options.

Types of Loans Available:

• • Term Loan: For purchasing machinery, expansion, or other capital expenditure.

  • Working Capital Loan: For boosting short-term liquidity and daily operations.

Documents Required:

• GST registration details or 12 months’ sales data.

• Latest 1–3 years ITRs (depending on loan type).

• 6 months’ bank statements.

• Business and loan requirement details.

3. PMEGP (Prime Minister’s Employment Generation Programme) Loan

PMEGP is a government-backed scheme offering financial support to individuals and institutions for setting up micro-enterprises, especially in the non-farm sector, in both rural and urban areas.

Key Features:

• Loan Coverage:

  • Up to ₹50 lakh for manufacturing.

  • Up to ₹20 lakh for services.

• Subsidy: 15%–35% of the project cost, reducing repayment pressure.
  
  

Benefits:

• • Collateral-free loans with CGTMSE guarantee.

  • Special marketing support through KVIC outlets and exhibitions.

  • Focus on self-employment in rural regions to curb migration.

Eligibility:

• Individuals aged 18 years and above.

• No educational qualification needed for smaller projects; minimum VIII standard for larger ones.

• New projects only; existing units are not eligible.

Required Documents:

• Aadhaar, PAN card.

• Caste certificate (if applicable).

• Rural area certificate.

• Project report.

• Educational/Skill Development Training certificates.

4. PMMY (Pradhan Mantri Mudra Yojana) Loan

The Pradhan Mantri Mudra Yojana (PMMY) provides loans up to ₹10 lakh for micro and small enterprises engaged in income-generating activities across sectors like manufacturing, trading, services, and allied agriculture activities.

Key Features: Loan Categories:

• • Shishu: Up to ₹50,000.

  • Kishore: ₹50,001 to ₹5 lakh.

  • Tarun: ₹5 lakh to ₹10 lakh.

Benefits:

• • Supports micro-businesses such as shopkeepers, vendors, truck operators, artisans, etc.

  • No collateral requirement for Shishu and Kishore categories.

Eligibility:

• Individuals, Proprietorships, Partnership Firms, Private/Public Limited Companies, and other legal entities engaged in non-farm income-generating activities.
  
  

Advantages of Debt Based Funding

• Retention of full ownership and profits.

• Tax benefits, as interest payments are usually tax-deductible.

• Faster access compared to equity fundraising.

• Clear repayment terms provide financial discipline.

Essential Documents for Debt Based Funding