Debt or equity: when debt makes sense
Debt lets you fund growth without diluting ownership, and interest is generally a tax-deductible expense. It works best when your business has predictable cash flows to service repayments, or assets that can be offered as security. Equity suits early, high-risk ventures without steady cash flows. Many growing businesses use both.
Step 1: Define exactly what you need the money for
Lenders match the facility to the purpose. Mixing them up is the most common reason for rejection or cash-flow stress later.
| Purpose | Right type of debt |
|---|---|
| Stock, receivables, day-to-day expenses | Cash credit, overdraft, WCDL |
| Machinery, equipment, expansion | Term loan |
| New plant or large project | Project finance |
| You own property and need larger, cheaper funds | Loan against property |
| Tenders, imports, supplier assurance | Bank guarantee, LC |
| Replacing expensive existing loans | Refinance / balance transfer |
Step 2: Check your eligibility the way a lender would
- Profitability and cash flow: can operating cash flow comfortably cover interest and principal (DSCR)?
- Leverage: existing debt relative to net worth and earnings.
- Credit history: the company's commercial credit report and promoters' personal credit scores, and repayment conduct on existing loans.
- Banking conduct: cheque returns, overdrawn accounts and cash deposits patterns in bank statements.
- Security: primary security on assets financed, and any collateral property.
- Compliance: filed ITRs, GST returns and audited financials that reconcile with each other.
Step 3: Prepare a lender-ready file
- KYC of the business and all promoters/directors
- Audited financials and ITRs for the last 3 years; provisional current-year numbers
- GST returns and 12 months of bank statements for all accounts
- Existing loan sanction letters and repayment schedules
- CMA data with projections (for working capital and term loans), or a DPR for projects
- Collateral documents, if offered
A short credit note explaining the business, the purpose of funds, how the loan will be repaid and any one-offs in the financials saves weeks of back-and-forth with the lender's credit team.
Step 4: Choose the right lenders
PSU banks often offer lower rates but have stricter processes; private banks are faster; NBFCs are more flexible on profile and collateral but usually costlier. Lender appetite also changes by sector and ticket size. Government-backed schemes such as the CGTMSE credit guarantee can enable collateral-free loans for eligible micro and small enterprises. For larger or complex requirements, a debt syndication advisor can place your file with several suitable lenders at once.
Step 5: Compare term sheets — not just the interest rate
- Interest rate and its benchmark (repo-linked, MCLR or lender's reference rate) and reset frequency
- Processing fees, documentation and prepayment charges
- Security, collateral cover and personal guarantees required
- Margins on working capital and cash margin on BG/LC
- Covenants, moratorium and repayment structure
Step 6: Sanction, documentation and disbursal
After sanction, the lender completes legal and technical checks on security, you sign the loan documents and create the charge, and funds are disbursed. Keep track of renewal dates, stock statements and covenant reporting — good conduct makes your next enhancement much easier.
Common mistakes to avoid
- Using short-term working capital to fund long-term assets.
- Applying to many lenders directly at once, which creates multiple credit enquiries.
- Financials, ITRs and GST returns that do not reconcile.
- Choosing the lowest headline rate while ignoring fees, collateral and covenants.
- Waiting until cash is critically short before applying.
Frequently asked questions
How can a small business raise debt in India?
Start by matching the purpose to the right product (working capital, term loan or loan against property), prepare 3 years of financials, ITRs, GST returns and bank statements, check your credit history, and approach banks, NBFCs or a debt syndication advisor. Eligible micro and small enterprises may also access collateral-free credit backed by the CGTMSE guarantee scheme.
What documents do banks need for a business loan?
Typically KYC of the business and promoters, audited financials and ITRs for 3 years, GST returns, 12 months of bank statements, details of existing loans, CMA data or a project report, and collateral documents if offered.
How long does it take to raise debt?
Simple, well-documented cases can be sanctioned within a few weeks. Larger term loans and project finance take longer because lenders carry out technical, legal and valuation appraisals.
Is it better to go to a bank directly or use a debt advisor?
Going direct can work for simple needs with your existing bank. An advisor helps when you need larger amounts, better terms, multiple lenders, or when your profile is complex.