Best Startup Business Loans for MSMEs in India 2024

India's MSME sector is one of the largest globally, substantially impacting the national economy. Contributing around 30% to the country's GDP, MSMEs also account for roughly 42% of exports and generate a significant portion of employment, particularly in semi-urban and rural areas. 

Traditional financing challenges such as the need for credit history and extensive documentation have historically limited access to funds for many small business owners. However, the rise of fintech tools, especially digital financing, has transformed MSME funding in India, helping businesses overcome traditional barriers like extensive documentation and credit history requirements. 

The growth of fintech solutions and supportive government policies have shifted this landscape, enabling MSMEs to access funds more efficiently. With initiatives focused on digital financing and tailored MSME schemes, India’s MSME loan portfolio grew by 17.8%, with a total number of MSME loans that originated at 2.74 crore in FY24.

MSME loans provide businesses with essential growth capital, supporting expansion, operational upgrades, and workforce scaling. These funds are typically used for business growth, working capital, equipment upgrades, and hiring. Designed with flexible terms and supportive financing options, these loans allow businesses to focus on what matters most—expansion and innovation.

This article explores the best MSME and startup business loans and schemes in India, offering insights to help founders evaluate and select the best financing options for their needs. 

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Types of Business Loans Available for Startups in 2024

1. Structured Term Loans

• Purpose: Tailored for project-based funding expansion, especially for businesses with periodic capital needs.
• Eligibility: Businesses with a clear business plan and a steady revenue stream will likely qualify for term loans.
• Interest Rates: Around 8-18% p.a. based on creditworthiness and lender terms.
• Repayment: Flexible terms, with options from 1 to 5 years.
• Preferred Lenders: NBFCs and select banks offering tailored loan terms​

2. Venture Debt

• Purpose: Provides non-dilutive funding for high-growth startups, often between equity rounds.
• Eligibility: Typically venture-backed startups.
• Interest Rates: Ranges between 8-15%, sometimes exceeds 20%.
• Repayment: Shorter tenures, often 1-3 years.
• Preferred Lenders: Venture debt funds and select NBFCs specializing in startup financing.​

3. Acquisition Financing

• Purpose: Used to fund acquisitions, helping companies expand by buying other firms or assets.
• Eligibility: Startups with proven profitability or high growth potential. For instance, a good credit score of a minimum of 680 is required for loan approval.
• Interest Rates: Usually range between 1.90% to 17%, as acquisition financing entails considerable risk.
• Repayment: Varies with loan structure, typically short to medium-term.
• Preferred Lenders: Specialized banks and venture debt funds focusing on acquisition financing​.

4. Working Capital Loan

• Purpose: Helps businesses manage operational expenses and cash flow by providing loans up to Rs. 40 lakh.
• Eligibility: Ideal for companies with fluctuating cash flows or seasonal demand.
• Interest Rates: Varies depending on the lender. 
• Repayment: Short-term, generally between 9 months to 1 year.
• Collateral: Unlike most unsecured business (or even personal) loans, no security or collateral is required to avail of a working capital loan from a bank or Non-banking Financial Company (NBFC).
• Preferred Lenders: Public sector banks, NBFCs​

5. Vendor Financing

• Purpose: Provides suppliers with funding to fulfill large orders, minimizing cash flow strain.
• Eligibility: Vendor finance is available to companies with regular and verifiable purchase orders. Businesses with proper cash flow, health financials, and good business relationships with their vendors are also eligible.
• Interest Rates: 5-10% depending on vendor and lender.
• Repayment: Typically within 1 month to 2 years.
• Collaterals: Yes, collateral may be necessary, and businesses may need to pledge some of their assets as security.
• Preferred Lenders: NBFCs focused on trade and vendor financing.

6. Bill Discounting

• Purpose: Converts receivables into immediate cash and ensures faster business growth by providing liquidity on easy, affordable terms.
• Eligibility: Ideal for companies with substantial accounts receivable.
• Interest Rates: Often between 11% and 14%.
• Repayment: Short-term tenure with maximum tenure for Invoice discounting finance is 120 days. 
• Preferred Lenders: Banks and NBFCs focusing on SME financing​.

7. Loan Against Property

• Purpose: Provides startup funding against commercial or residential property as collateral.
• Eligibility: Owners with clear property titles.
• Interest Rates: Relatively low at around 9-12% due to its secured nature.
• Repayment: Long-term, typically up to 15 years.
• Preferred Lenders: Major public and private sector banks​.

8. PO Financing 

• Tenure: Mostly short-term, ranging from 30-120 days.
• Collateral: The purchase order is binding between the lender and the receiver. Hence, No collateral is required! 
• Interest Rates: Typically range between 1.5% to 6% per month.
• Purpose: To help businesses fund the cost of fulfilling large purchase orders when working capital is limited, making it ideal for high-volume orders.

For startups and SMEs looking for a go-to solution to meet their varied financing needs, check out Recur Scale. It is a product of Recur Club that boasts partnerships with 125+ marquee lenders, Tata Capital, HSBC, and many more. 

Cut your financing time in half and experience India’s simplest, fastest, and safest financing journey. Learn more about Recur Scale here!

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Top Financial Institutions Providing Startup Loans

When seeking startup business loans, various banks and non-banking financial companies (NBFCs) offer competitive options tailored to the needs of new businesses. The table below presents an overview of leading banks and NBFCs that provide favorable loan conditions for startups:

Non-banking Financial Companies (NBFC loans)

NBFCs have become a compelling alternative to traditional banks, particularly for MSMEs that may not qualify under stricter bank lending criteria. NBFC loans often provide more flexible terms and require less stringent collateral requirements. For established MSMEs with consistent cash flow, bank loans are often the most economical choice. In contrast, NBFCs offer greater flexibility for startups seeking rapid access to capital. Meanwhile, Fintech platforms, with their streamlined digital processes, are ideally suited for agile, asset-light startups seeking fast, accessible funding.

Recur Club is one such platform that connects startups with over 50 prominent lenders, including Tata Capital, HSBC, Aditya Birla Capital, INCRED, Ugro Capital, and other NBFCs, banks, and institutional capital providers. 

For example, in June 2024, Recur Club collaborated with Incred to launch a funding initiative of up to ₹300 crore in, specifically aimed at supporting early- to mid-stage startups focused on scaling quickly. This collaboration underscores Recur Club’s commitment to providing accessible capital for startups at crucial growth stages. 

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Popular MSME Government Loan Schemes in India in 2024

According to the Udyam portal, India’s MSME sector is a fundamental economic pillar that employs over two crore individuals. This sector has proliferated, contributing around 46% of the nation’s total exports. 

Below are some MSME loan schemes in India that are supported by government initiatives and technological advancements: 

Pradhan Mantri Mudra Yojana (PMMY)

PMMY offers loans, termed as MUDRA (Micro Units Development and Refinance Agency Limited) loans, through various institutions, including commercial banks, microfinance institutions (MFIs), and non-banking financial companies (NBFCs). MUDRA, an NBFC itself, refinances these lenders to support MSMEs.

Objective: Launched on April 8, 2015, by the Prime Minister of India, PMMY aims to provide loans up to ₹10 lakh to non-corporate, non-farm small or micro-enterprises, supporting their growth and financial stability.

Eligibility Criteria:

• Loans are available to micro and small businesses outside the corporate and farming sectors.
• Loan applications can be made through commercial banks, small finance banks, MFIs, NBFCs, or online via the UdyamiMitra portal.

Loan Categories:

• Shishu: Loans up to ₹50,000 for initial business stages.
• Kishore: Loans between ₹50,000 and ₹5 lakh for businesses in a mid-growth phase.
• Tarun: Loans between ₹5 lakh and ₹10 lakh for more established small enterprises needing more extensive capital support.

SIDBI Make in India Soft Loan Fund for MSMEs (SMILE)

The SIDBI Make in India Loan for Enterprises (SMILE) aims to support the "Make in India" initiative by actively enabling MSMEs to participate through accessible financing. This program helps MSMEs with flexible, growth-oriented loans tailored for new setups and expansions within the sector.

Objective: Supports the “Make in India” initiative by providing soft loans to MSMEs for establishment and growth, focusing on small enterprises.

What It Is: The SIDBI SMILE initiative offers quasi-equity and term loans on favorable terms to help MSMEs meet debt-equity requirements and expand, modernize, or upgrade technology.

Eligibility: Open to new MSMEs in manufacturing and services and existing MSMEs looking to expand or upgrade.

Loan Details:

• Minimum Loan: ₹10 lakh for equipment finance, ₹25 lakh for others.
• Repayment Period: Up to 10 years, with a moratorium of up to 36 months.

Find more info about SIDBI Loan Schemes and Applications Steps for Startups in India here. 

Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGTMSE)

Established by the Ministry of MSMEs and SIDBI, the CGTMSE scheme is managed by the Credit Guarantee Fund Trust for Micro and Small Enterprises. It provides collateral-free loans through a credit guarantee for MSEs, enabling them to access loans without needing to pledge assets. The scheme applies only to businesses with tangible assets, like real estate or machinery, and excludes educational institutions, training centers, self-help groups (SHGs), and agriculture-related activities.

Objective:

The CGTMSE scheme, launched in 2000, aims to provide collateral-free credit to India's micro and small enterprises (MSEs) to encourage entrepreneurship and reduce financial barriers.

Eligibility Criteria:

• Open to new and existing micro and small enterprises with physical business premises and tangible assets.
• Not applicable to educational or training institutions, SHGs, or agriculture-based businesses.

Loan Details:

• Collateral-Free Limit: Up to ₹10 lakh.
• Loans over ₹10 Lakh to ₹1 Crore: These may require primary security or a mortgage on land or buildings related to the business.
• Fees: Borrowers pay a one-time guarantee fee (1.5% for loans above ₹5 lakh, 1% for loans up to ₹5 lakh) and an annual service fee (0.75% or 0.5%, respectively).

In FY24, guarantees worth ₹2 lakh crore were approved, the highest ever in a fiscal year. To apply for business loans through this scheme, you would need documents such as:

1. Completed CGTMSE loan application form
2. Company Registration Certificate 
3. Detailed Business Project Report
4. CGTMSE Loan Coverage Letter 
5. Additional documents, as the lending bank requires

Stand-Up India Scheme

The Stand-Up India Scheme focuses on SC/ST and women entrepreneurs in manufacturing, services, and greenfield enterprises. Below mentioned are some crucial details of the scheme: 

Objective: Provides loans between INR 10 lakh and INR 1 crore to SC/ST and women entrepreneurs for greenfield (first-time) ventures in manufacturing, services, or trading sectors.

Eligibility Criteria:

• Applicants must be 18 years or older.
• The business must be a private limited company, LLP, or partnership firm with a turnover under INR 25 crore.
• Entrepreneurs must be women or belong to the SC/ST categories.
• Only greenfield (new) projects are eligible.
• Applicants must not be defaulters with any banks.
• The business should involve commercial or innovative consumer goods.

Loan Details:

• Repayment period: Up to 7 years with a maximum 18-month moratorium.
• Accessible through bank branches, the SIDBI Stand-Up India Portal, or a Lead District Manager.
• The scheme mandates 1.25 lakh bank branches to lend to at least one SC/ST and one woman entrepreneur annually.
• When filing a patent application, eligible applicants can receive an 80% tax rebate.

For a comprehensive look at government-backed funding solutions, check out our article on Government Loan Schemes for Small Business Funding in India.

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Step-by-Step Guide to Apply for an MSME Loan 

Here’s a straightforward guide on how to apply for an MSME loan:

1. Assess Financial Requirements: Evaluate specific business needs such as scaling operations, equipment purchase, or working capital to estimate the required loan amount.
2. Verify Eligibility Criteria: Review qualifications based on metrics like business tenure, revenue turnover, and credit history to ensure loan eligibility aligns with lender standards.
3. Prepare Documentation: Compile necessary documentation, including business registration, audited financial statements, and KYC details, to substantiate creditworthiness.
4. Evaluate Lender Options: Compare offers from banks, NBFCs, and government schemes, considering interest rates, loan tenure, and terms.
5. Submit Application: Apply online or in-branch with the requisite documentation and proceed with due diligence for final approval.

Documents Required to Apply for a Startup Business Loan in India

To apply for an MSME business loan in India, applicants typically need the following documents:

Check this Guide on How to Get a Startup Business Loan to familiarize yourself with the basics of obtaining startup loans.

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Criteria for Selecting the Best Business Loans

Determining a suitable startup loan option is imperative for entrepreneurs, especially with an array of MSME loan options available. Startup founders must consider the following points to make this decision: 

1. Loan Terms & Interest Rates: Understand the repayment period, interest rates, and moratoriums to plan your finances effectively.
2. Collateral Requirements: Some loans are collateral-free, while others require assets for better terms.
3. Business Needs: Align the loan amount with your specific needs, such as working capital or equipment purchase.
4. Government Schemes & Subsidies: Look for government-backed loans and subsidies that reduce your financial burden.
5. Creditworthiness: Maintain a healthy credit score for easier approval and better loan terms.
6. Repayment Plan: Choose flexible repayment options that fit your business cash flow.

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Future Trends to Expect for MSMEs in India 

As India progresses toward a $5 trillion economy by 2026-27, MSMEs are positioned to be key growth accelerators, with a projected valuation of $1 trillion by 2028. Increased access to funding sources—whether through traditional banks, NBFCs, or fintech—is essential for fueling this expansion. 

The Digital MSME Scheme further aids this transformation by promoting ICT adoption on the Udyam portal. At the same time, the Ministry of MSMEs has allocated INR 22,137.95 crore in the 2024-25 budget for modernization, boosting both innovation and competitiveness across the sector.

Discover tailored debt financing options with Recur Club and access the capital you need to thrive in 2024. We offer customized debt structures and have financed over 700 startups and SMEs across various sectors, including SaaS, D2C, EV, logistics, and manufacturing. This includes notable startups like Ustra, Xoxoday, and Freightify. 

Interested in learning more? Book a free one-on-one financing advisory call with our dedicated capital experts today!