A startup is an early-stage company founded by entrepreneur(s) to develop a unique product, service, or business model and bring it to market, often characterized by a focus on high growth and scalability.
Talking about India – we are now ranked as the third-largest startup ecosystem in the world.
As of January 2025, the number of startups recognized by the Startup India initiative stood at ~1.59 lakh (159,000+). Click here for the report
The number of unicorns (startups valued at USD 1 billion+) has jumped from very few (single digits) in earlier years to over 100 unicorns.
The KPMG “Exploring India’s dynamic Start-up Ecosystem” report says – In FY23, startups infused about USD 140 billion into the Indian economy (per reported summary) and over ~1.5 lakh jobs created since 2016.
All of this is more than encouraging data for one to think of an idea for a start-up of their own.
But wait…what could a start-up possibly be without sufficient funding?
While most are aware that a start-up needs funding at various stages like idea, seed, early growth, expansion and more, let us talk in detail about what are the sources of such funding that entrepreneur(s) can look up to:
Bootstrapping – A funding strategy where a business uses its own resources, such as personal savings, friends and family, and the revenue generated by the company, to get started and grow, rather than seeking outside investment like venture capital or loans. This approach allows founders to retain full ownership and control, focus on profitability, and grow at their own pace without pressure from investors.
Angel & VC – Both are types of equity financing. Angel investors are wealthy individuals investing their own money in early-stage companies, often at a smaller scale and with more flexible terms. Venture capitalists (VCs) are professional investors managing pooled money from institutions, investing larger sums in high-growth companies and typically taking a more hands-on approach.
Incubators & Accelerators – Incubators provide a more flexible and nurturing environment for nascent ideas, sometimes offering non-dilutive funding. Accelerators offer more structured, short-term programs that provide seed funding in exchange for equity, along with intensive mentorship.
Bank Finance – Bank startup funding is capital provided by a bank to a new or early-stage business, typically in the form of a loan that must be repaid with interest. Unlike equity financing, which involves selling ownership, this debt financing provides funds for operational expenses and growth without diluting the owners’ stake in the company.
In this blog, lets talk more about how Bank Finance works for start-ups.
What will a bank need before they approve the funding for your start-up:
1. A stable revenue model
2. Clear Financial Statement
3. Collateral (security)
4. A predictable cash flow for loan repayment (think of a personal loan from a bank – they will lend only when sure of the borrower’s capacity to pay back)
Hence, banks usually do not lend to a start-up in its early stage.
So, at what stage should / can entrepreneur(s) reach out to banks for funding?
1. The business has operational history (12–24 months)
2. Revenue is consistent
3. The founder(s) shows ability to repay
4. A collateral/guarantor/security is available
In short, Banks fund scaling, not experimenting.
It helps to know bank’s recovery options as well, in case the start-up fails (and no, this is not to discourage, but to be able to make informed decisions):
1. If there is a collateral, Banks try to recover through assets or guarantees
2. For collateral-free loans, banks may use credit guarantee schemes like *CGTMSE
Now, that we know the basics, lets look at what are the various forms of lending that start-ups can expect from a Bank:
1. Working Capital Loans – These are short-term loans to keep day-to-day operations running, used for paying suppliers, managing payroll, buying inventory. These can be availed at early/growth stage when there is some revenue or order pipeline. These are given in the form of Cash Credit and/or Overdraft.
2. Term Loans – As the name says, this is a fixed loan amount payable over ‘n’ years, used for office setup, technology/software/machinery purchases and expansion. These can be availed once the business model is stable and ready to scale.
3. Loan against Property (LAP) – The term explains it all; personal / business property is the collateral. This one comes in handy if the start-up lacks credit history or sufficient revenue. This way, even if it is a high-risk proposition, the banks are safer with the collateral.
4. *CGTMSE (Collateral-Free Loans) – The amount of typically INR 2 Crore (varies by bank). The Government is a guarantee to the bank and hence the banks need no collateral. These are best suited for early stage **SMEs with registered business and a basic turnover.
To sum it up all, banks do support start-ups, at a reliable stage, though. What works in the favor of entrepreneur(s) or other investor(s) of the start-up is that banks do not work on equity – there is no dilution of it.
Make informed decisions and keep scaling! Who knows, your start-up could be the next Unicorn.
*CGTMSE – Credit Guarantee Fund Trust for Micro and Small Enterprises. CGTMSE
**SME – Small and Medium Enterprise
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Ruchi Ahluwalia
A banking professional
ruchi.ah@gmail.com