Top Short-term Funding options for Startups in India

Top Short-term Funding options for Startups in India - Financing immediate cash needs. According to a report Bloomberg Economic Analysis released in April 2024, India could become the World’s number one country driving global growth by 2028. With an average 9% growth in GDP by the end of this decade, the Indian economy is likely to surpass China’s growth. The backbone of this growth are emerging startups and businesses in India. 
In this post, we trace multiple funding alternatives available to startups for quick access to funding, assess their potential impacts and highlight possible scenarios where your business may be in need of short-term financing. 
Funding Needs - Assessing and Planning for your goals 
Funding may be required in the short term for meeting specific goals of fulfilment of inventory, or in the long term for machinery or building a factory. These are typically funds arranged for meeting financial obligations that are due for less than 12 months. 
Boot-strapping - In this phase, a startup needs to get its business off the ground. Expenses may be incurred in arranging permits, licences, meeting statutory requirements under contracts, registering a company, opening bank accounts, fees for legal advice etc. At this stage, most promoters and entrepreneurs use personal savings and money borrowed from informal sources like friends and family. 
Seed funding from Angel Investors - Angel investors are usually individuals or firms with a heavy risk appetite, who invest in high-risk startups during their early stages. An Angel investment agreement may also involve funding for seed capital needs of the business. 
Funding for Working Capital and Short-term needs - Working capital is the difference between the company’s current assets (such as cash, receivables and inventory) and current liabilities. In early stages of the company, short-term capital may be required for payment of salaries, rent, office expenses. A host of alternatives such as bank loans, lines of credit, factoring, trade credit, invoice financing etc, discussed below can be utilised for fulfilling immediate and short-term cash requirements. 
Funding Options for Startups for meeting Short-term financing needs  
For the purpose of meeting day to day needs of cash, supporting growth, financing inventory during peak season or payment of routine expenses during lean season, a startup may tap into the following - 
Bank loans - A startup founder can negotiate with banks and open current accounts for businesses that allow overdrafts at low rates of interest. 
Financing for small enterprises under concessional government loans - For small and micro units, the PM Mudra Yojana provides loans of upto 50,000, between 50,000 to 5 lacs and between 5 lacs to 10 lacs as micro-credits. The interest rate varies between 8-12% for these. Additionally, for entrepreneurs in rural areas, or those working with Self-help groups, Swarozgar credit cards are offered on concessional terms. 
Lines of credit-  A line of credit is an agreement between the bank and the borrower and outlines the maximum loan that can be availed by the borrower in a specified time period. While loans are principal amount and interest paid over a period of time, a line of credit gives ongoing access to funds that can be reused, with the interest being charged only on the amount drawn. 
Trade credit - A trade credit is a B2B agreement where one party purchases goods without paying cash up front, and paying the supplier later at a scheduled date. Trade credits usually operate in 30, 60 or 90 day cycles. Thus, goods can be pricey without making immediate cash payments.  
Factoring - Factoring refers to a specific kind of financing, where a business transfers its accounts receivables (or invoices that are yet to be paid) to a third party, such as banks. When a business is in immediate need of cash, and the date on which money is due is still some time away, this third party called the factor steps in to fund, and later recovers the money on the due date. The factor charges commission or fees for this service. 
Bill Discounting for Medium and Small Industries - A beneficial scheme by the government of India allows discounting of bills of medium and small startups in India for their supplies to public limited companies, state and central departments and government undertakings. The rate of interest charged for this service is around 12.5%. 
Invoice financing - Quite similar to factoring, invoice financing helps a business in improving cash flow, by transferring the invoices to a lender. The lenders, which are often banks, use the invoice as a collateral and give funds by discounting their fee from the total amount received on the invoice.
Non-traditional alternatives for short-term financing for your business  
Other than the above mentioned alternatives to secure funds, in the age of massive developments in banking technologies and internet, there are several new forms of obtaining funds. 
Online lending and App-based Pre-Approved Loan Facilities- There are several websites offering instant personal loans. Traditional large banks in India such as SBI, Axis bank offer app based pre-approved loan facilities. The terms of these loans may be contingent on the size of the business, the amount of funds parked in the bank as well as past credit history. There are several online lending platforms as well that provide instant on-tap loan options. However, one must be careful of dubious apps which specify conditions that may sound too good to be true. 
Micro-financing from SIDBI - The Small Industries Development Bank of India extends concessional loan facilities for micro and small enterprises. It also allows NGOs to access funds without the need for collateral. 
Raw-material assistance from NSIC - With an aim of helping medium and small entrepreneurs for financing purchase of raw material, financial assistance for procuring raw material as part of the inventory for up to 90 days is provided by the National Small Industries Corporation (NSIC). It also helps avail the benefits of cash discounts for large bulk purchases of the inventory. 
Tips on Estimating and Managing Short-term Working Capital Needs
Proper management of working capital funding is essential for seizing growth opportunities. For a startup, assessing and planning funding according to their specific financial metrics, sales, cost analysis and cash flows is crucial. Here are a few tips to help your business with these decisions- 
Obtaining performance and credit rating - Having a secure credit rating can go a long way in ensuring easy access to funds on concessional terms. The National Small Industries Corporation (NSIC) provides a platform of empaneled rating agencies. For small companies, the NSIC also makes partial reimbursement of the rating fee. The ratings are a combination of operations, finance, current and future business and management risk.

Estimating working capital cycle - The working capital life cycle refers to the time period between the acquisition of raw materials until the completion of the transaction when cash is collected from the customer. It includes estimating the time period and financial obligations for each stage of the business, such as procurement, production, sales, marketing and payments. The longer the time period, more is the need for working capital.

Negotiating flexible terms with banks - An entrepreneur with a sound credit rating and a foreseeable profitability in future can negotiate concessional terms with banks, such as unlimited withdrawals, low rates of interest, add-on loans during peak season without incurring additional surcharges etc.

The decision to choose the right mix between varied funding options can have both short and long term impacts on the financial sustainability of the business. Consult with our qualified finance professionals at Compliance Calendar to get specific advice on finding the right financing options for your startup.

According to a report Bloomberg Economic Analysis released in April 2024, India could become the World’s number one country driving global growth by 2028. With an average 9% growth in GDP by the end of this decade, the Indian economy is likely to surpass China’s growth. The backbone of this growth are emerging startups and businesses in India.

In this post, we trace multiple funding alternatives available to startups for quick access to funding, assess their potential impacts and highlight possible scenarios where your business may be in need of short-term financing.

Funding Needs - Assessing and Planning for your goals

Funding may be required in the short term for meeting specific goals of fulfilment of inventory, or in the long term for machinery or building a factory. These are typically funds arranged for meeting financial obligations that are due for less than 12 months.

Boot-strapping - In this phase, a startup needs to get its business off the ground. Expenses may be incurred in arranging permits, licences, meeting statutory requirements under contracts, registering a company, opening bank accounts, fees for legal advice etc. At this stage, most promoters and entrepreneurs use personal savings and money borrowed from informal sources like friends and family.

Seed funding from Angel Investors - Angel investors are usually individuals or firms with a heavy risk appetite, who invest in high-risk startups during their early stages. An Angel investment agreement may also involve funding for seed capital needs of the business.

Funding for Working Capital and Short-term needs - Working capital is the difference between the company’s current assets (such as cash, receivables and inventory) and current liabilities. In early stages of the company, short-term capital may be required for payment of salaries, rent, office expenses. A host of alternatives such as bank loans, lines of credit, factoring, trade credit, invoice financing etc, discussed below can be utilised for fulfilling immediate and short-term cash requirements.

Funding Options for Startups for meeting Short-term financing needs

For the purpose of meeting day to day needs of cash, supporting growth, financing inventory during peak season or payment of routine expenses during lean season, a startup may tap into the following -

Bank loans - A startup founder can negotiate with banks and open current accounts for businesses that allow overdrafts at low rates of interest.

Financing for small enterprises under concessional government loans - For small and micro units, the PM Mudra Yojana provides loans of upto 50,000, between 50,000 to 5 lacs and between 5 lacs to 10 lacs as micro-credits. The interest rate varies between 8-12% for these. Additionally, for entrepreneurs in rural areas, or those working with Self-help groups, Swarozgar credit cards are offered on concessional terms.

Lines of credit- A line of credit is an agreement between the bank and the borrower and outlines the maximum loan that can be availed by the borrower in a specified time period. While loans are principal amount and interest paid over a period of time, a line of credit gives ongoing access to funds that can be reused, with the interest being charged only on the amount drawn.

Trade credit - A trade credit is a B2B agreement where one party purchases goods without paying cash up front, and paying the supplier later at a scheduled date. Trade credits usually operate in 30, 60 or 90 day cycles. Thus, goods can be pricey without making immediate cash payments.

Factoring - Factoring refers to a specific kind of financing, where a business transfers its accounts receivables (or invoices that are yet to be paid) to a third party, such as banks. When a business is in immediate need of cash, and the date on which money is due is still some time away, this third party called the factor steps in to fund, and later recovers the money on the due date. The factor charges commission or fees for this service.

Bill Discounting for Medium and Small Industries - A beneficial scheme by the government of India allows discounting of bills of medium and small startups in India for their supplies to public limited companies, state and central departments and government undertakings. The rate of interest charged for this service is around 12.5%.

Invoice financing - Quite similar to factoring, invoice financing helps a business in improving cash flow, by transferring the invoices to a lender. The lenders, which are often banks, use the invoice as a collateral and give funds by discounting their fee from the total amount received on the invoice.

Non-traditional alternatives for short-term financing for your business

Other than the above mentioned alternatives to secure funds, in the age of massive developments in banking technologies and internet, there are several new forms of obtaining funds.

Online lending and App-based Pre-Approved Loan Facilities- There are several websites offering instant personal loans. Traditional large banks in India such as SBI, Axis bank offer app based pre-approved loan facilities. The terms of these loans may be contingent on the size of the business, the amount of funds parked in the bank as well as past credit history. There are several online lending platforms as well that provide instant on-tap loan options. However, one must be careful of dubious apps which specify conditions that may sound too good to be true.

Micro-financing from SIDBI - The Small Industries Development Bank of India extends concessional loan facilities for micro and small enterprises. It also allows NGOs to access funds without the need for collateral.

Raw-material assistance from NSIC - With an aim of helping medium and small entrepreneurs for financing purchase of raw material, financial assistance for procuring raw material as part of the inventory for up to 90 days is provided by the National Small Industries Corporation (NSIC). It also helps avail the benefits of cash discounts for large bulk purchases of the inventory.

Tips on Estimating and Managing Short-term Working Capital Needs

Proper management of working capital funding is essential for seizing growth opportunities. For a startup, assessing and planning funding according to their specific financial metrics, sales, cost analysis and cash flows is crucial. Here are a few tips to help your business with these decisions-

Obtaining performance and credit rating - Having a secure credit rating can go a long way in ensuring easy access to funds on concessional terms. The National Small Industries Corporation (NSIC) provides a platform of empaneled rating agencies. For small companies, the NSIC also makes partial reimbursement of the rating fee. The ratings are a combination of operations, finance, current and future business and management risk.

Estimating working capital cycle - The working capital life cycle refers to the time period between the acquisition of raw materials until the completion of the transaction when cash is collected from the customer. It includes estimating the time period and financial obligations for each stage of the business, such as procurement, production, sales, marketing and payments. The longer the time period, more is the need for working capital.

Negotiating flexible terms with banks - An entrepreneur with a sound credit rating and a foreseeable profitability in future can negotiate concessional terms with banks, such as unlimited withdrawals, low rates of interest, add-on loans during peak season without incurring additional surcharges etc.