Imagine you want to open a small kirana shop in Pune or start a dosa stall in Chennai. You’ve saved some money, but it’s not quite enough to buy stock or essential equipment. You’ve thought about taking a loan, but the word “debt” makes you uneasy—like it’s something risky or hard to manage.
Let me assure you: debt, when used wisely, can be a powerful tool to help your business grow.
This guide is designed especially for beginners. We’ll walk through how to use loans to fund your business, when it makes sense to borrow, and how to manage debt responsibly. We’ll use simple examples—so everything is easy to relate to and put into practice.
By the end, you’ll have the confidence to use debt carefully and effectively, whether you’re starting a single shop or planning to expand across India.
What Is Debt, and Why You Don’t Need to Fear It
Let’s keep it simple: debt is money you borrow and agree to repay later, usually with some interest.
For example, if you borrow ₹5,000 from a cousin to buy a pressure cooker for your catering business and repay ₹5,500 over six months, that extra ₹500 is the interest.
In business, debt could mean taking a ₹10 lakh loan from a bank to buy a delivery van or getting 30-day credit from a supplier to buy stock. It’s a way to get the funds you need today to grow your business tomorrow.
Many people worry about debt because they’ve heard stories of businesses getting overwhelmed by loans. But debt isn’t the enemy—it’s a tool. Just like a kitchen knife, it can be useful or harmful depending on how you use it. Used properly, it can help your business expand.
The smart way to use debt is to borrow for things that help your business make more money—like buying a new sewing machine so you can take more tailoring orders. Or investing in a coffee machine for your cafe so you can serve more customers and increase sales. In these cases, the income from your new equipment can help repay the loan and still leave you with a profit.
Always borrow with a plan. Make sure the money you’re borrowing will help your business grow—and that you can repay it through future profits. Don’t take loans for things that don’t earn money, like fancy signboards or non-essential upgrades.
Understanding the Different Types of Business Debt
Just like a thali has different dishes, business debt comes in several forms. Each serves a unique purpose, and knowing which one to use can make a big difference in how you grow your business. Let’s look at the most common types of debt Indian small business owners use—with simple examples.
1. Bank Loans
These are traditional loans from banks and financial institutions. Think of them as borrowing from a strict but dependable relative—they’ll lend you money, but only if they’re confident you can pay it back.
- How It Works: You apply for a fixed loan amount, agree on an interest rate (say 10%), and repay it over time in monthly installments. Banks may ask for collateral—like equipment or shop furniture—or even a personal guarantee.
- Example: Priya, a tailor in Chennai, took a ₹5 lakh loan from a bank to buy new sewing machines. Her steady income and offering the machines as collateral helped her get the loan approved.
For major expenses like expanding your shop, buying equipment, or opening a new location.
2. Vendor Credit
This is short-term credit from your suppliers. It allows you to get goods today and pay later—typically within 30 to 60 days.
- How It Works: A supplier delivers stock—say ₹50,000 worth of flour for your bakery in Hyderabad—and gives you time to pay. You sell the baked goods, collect money from customers, and then settle the supplier’s bill.
- Why It’s Helpful: It eases cash flow and helps you keep operations running without immediate payment.
For everyday purchases like raw materials or inventory, especially when your cash is tied up elsewhere.
3. Customer Advances
This is money you collect from customers before delivering your product or service.
- How It Works: If you run a gym in Bengaluru and charge ₹10,000 for a yearly membership upfront, that money can be used to cover costs now.
- Example: A chai stall in Delhi offered a ₹2,000 “Chai Pass” for a year of discounted tea. Fifty customers signed up, giving the owner ₹1 lakh upfront—enough to buy a new stove.
For services or products with ongoing use or delivery, such as memberships, subscriptions, or custom orders.
4. Leasing
Leasing means renting equipment instead of buying it outright. This helps you avoid large upfront costs.
- How It Works: Instead of paying ₹3 lakh for a new oven, you lease it for ₹8,000 per month. This frees up money for other needs like marketing or staff wages.
- Example: A boutique in Pune leased an embroidery machine worth ₹2 lakh for ₹6,000 per month, preserving cash for fabric and salaries.
When you need equipment but want to keep your capital free for other expenses.
Each type of debt serves a different purpose. The key is to choose the right one for your situation—and always make sure you can repay it from your business income.
Key Features of Debt: Maturity and Security
To borrow smartly, you need to understand two important terms: maturity and security. Think of these as the “when” and “what if” of borrowing—when you have to repay, and what happens if you can’t.
1. What Is Debt Maturity?
Maturity means the length of time you have to repay the debt. It’s like the return date on a borrowed book—some are due soon, others much later.
- Short-Term Debt: Must be repaid within a year. Example: A 30-day credit from your vegetable supplier for your vada pav stall is short-term.
- Long-Term Debt: Paid back over several years. Example: A 10-year loan to buy shop space in Kolkata or a 5-year loan to renovate your kirana shop.
Short-term debt helps with daily expenses, while long-term debt is better for big investments that take time to earn returns.
2. What Is Debt Security?
Security refers to what the lender can claim if you don’t repay. It’s a way for lenders to protect themselves.
- Secured Debt: Backed by something valuable, like equipment or property. Example: If you take a ₹10 lakh loan to upgrade your shop, and it’s secured by your equipment, the bank can take that equipment if you default.
- Unsecured Debt: Not tied to any asset. Example: Your spice supplier might give you ₹20,000 worth of goods on trust, with no collateral. Since it’s riskier for them, they may charge a higher price or interest.
Secured loans usually have lower interest rates because they’re less risky for lenders. Unsecured credit is common for day-to-day needs but can be more expensive.
Always ask your lender what happens if you can’t repay. For secured loans, know exactly which assets are on the line. It’s better to be clear from the start than face surprises later.
When Should You Borrow for Your Business?
Borrowing money isn’t something to take lightly—it’s not like ordering an extra plate of samosas just because you feel like it. You need a solid reason and the right conditions. Here are three clear signs it might be the right time to borrow for your business:
1. You Have Assets to Offer as Security
Lenders prefer safety. If you can back the loan with something valuable—like your shop equipment or a personal guarantee—they’re more likely to approve your request.
For Example, if you need ₹10 lakh to open a new dosa stall, the bank might accept your tawa, fridge, or other kitchen equipment as collateral.
It’s like borrowing a friend’s bike—they’ll feel more comfortable lending it if you agree to replace it if anything happens.
2. Your Business Has a Track Record
Banks look for businesses that are steady and reliable, even if they’re small. They want to see that you’re not likely to shut down overnight.
For example, if your kirana shop in Ahmedabad has been running smoothly for three years, or you’ve operated a chai stall in Mumbai serving 200 cups a day for two years, that shows consistency—something lenders value.
You don’t need to be hugely profitable, but showing regular income and customer flow builds trust.
3. Your Financials Can Handle a Loan
Lenders will check your income, expenses, and cash flow—just like a doctor checks your vital signs. If your profits leave enough room for loan repayments, you’re in a good position to borrow.
For example, Raj owns a sweet shop in Jaipur. He earns ₹2 lakh per month and spends ₹1.4 lakh. He wants a ₹7 lakh loan to buy a delivery van. His healthy profit margin and ability to offer the van as collateral make his application stronger.
If your margins are tight or you’re barely breaking even, lenders may hesitate—unless you offer strong security or have a solid repayment plan.
Banks often ask for a basic business plan. This isn’t just paperwork—it’s your chance to show how the loan will help your business grow and how you’ll repay it.
For example, if you want to add a juice counter to your café, a plan explaining how it will increase foot traffic and sales can help convince the lender.
Borrow only when your business is ready—when you have something to offer as security, a stable income, and a clear plan for growth. That’s how you turn a loan into a smart step forward, not a financial burden.
Different Ways to Borrow Money for Your Small Business
Choosing the right loan is like picking the right mango—some are sweet, others a bit sour, and each has a different cost. Here are the main ways small business owners in India can borrow money, and when each option makes sense.
1. Bank Loans
Banks are a popular and reliable source of funding—but they’re selective. To qualify, you usually need:
- Profitable Operations: Your business should generate enough income to cover loan repayments.
- Good Collateral: Banks prefer assets like equipment or property over stock that depreciates quickly.
- Healthy Finances: Minimal existing debt and a strong cash flow.
- Backup Plan: Often, they’ll ask for a personal guarantee.
- Growth Strategy: A clear plan to show how you’ll use the money to grow.
A bakery in Bengaluru earning ₹2 lakh profit annually got a ₹10 lakh loan from Axis Bank at 10% interest to add a café section—using its ovens as collateral.
2. Asset-Based Lending
If a bank says no, an asset-based lender might say yes. These lenders focus on the value of your current assets—such as unpaid invoices or inventory.
- How It Works: If your catering business has ₹5 lakh in pending customer payments, an ABL might lend you ₹4 lakh (around 80% of that amount).
- What to Expect: Higher interest rates (e.g., 15%) and regular reporting of your receivables.
Businesses with steady sales and lots of unpaid invoices but limited collateral.
3. Leasing Equipment or Property
Instead of buying costly equipment, you can lease it. Leasing helps preserve cash for day-to-day operations.
A textile shop in Surat leases a ₹4 lakh loom for ₹10,000 per month, saving money upfront for fabric and staff salaries.
When you need important machinery or property but want to avoid large upfront costs.
4. Government Loans
The Indian government offers affordable loans for small businesses through schemes like MUDRA, SIDBI, and Startup India.
Lower interest rates and flexible terms, though paperwork can be more involved. A handicraft business in Delhi got a ₹5 lakh MSME loan at 8% interest—cheaper than most bank loans.
Explore schemes under Startup India, Credit Guarantee Fund, or Stand-Up India—some offer grants or loans with minimal collateral.
5. Factoring Receivables
Factoring means selling your unpaid invoices to a finance company to get quick cash.
- Example: If your catering business has ₹3 lakh in outstanding bills, a factoring firm might pay you ₹2.7 lakh immediately and collect the full ₹3 lakh later.
- Caution: It’s fast but expensive, and your customers might be confused by another company asking for payments.
Businesses with high-volume sales on credit that need quick liquidity.
6. Subordinated Debt (Friends & Family Loans)
This is money borrowed from someone you know—like a relative or friend—who agrees to be paid only after formal lenders are repaid.
- Example: You borrow ₹3 lakh from your aunt to expand your shop. She agrees to wait until you repay your bank loan before she’s paid back.
- Benefit: More flexible terms.
- Drawback: May come with emotional strings or higher risk if not handled professionally.
Always put the agreement in writing to avoid misunderstandings.
Each borrowing method has its pros and cons. Choose based on your business needs, repayment capacity, and available assets. The smartest borrowers match the right type of loan to the right stage of business growth.
Creative Ways to Get Cash Without Taking a Loan
You don’t always need a bank to find money for your business. Sometimes, it’s just about using what you already have—like discovering extra masala in your pantry when you thought you were out. Here are smart, loan-free ways to boost your cash flow:
- Improve Internal Cash Flow: Start by reducing costs. Every rupee saved is a rupee earned. For example, Switching to a more affordable rice supplier could save ₹5,000 a month. That adds up to ₹60,000 a year—money you can reinvest into your business.
- Customer Prepayments: Offer prepaid deals or loyalty cards to bring in cash upfront. For example, sell a ₹1,000 prepaid sweets card that gives customers discounts throughout the year. If 100 customers sign up, that’s ₹1 lakh in your hands right now.
- Negotiate Longer Supplier Payment Terms: Ask your suppliers for more time to pay, especially during busy seasons. For example, getting a 60-day payment window during Diwali can help you sell more stock before the bill is due—giving you extra breathing room without needing a loan.
- Look for Government Grants: Government schemes like Startup India, Stand-Up India, and MSME Innovation Schemes sometimes offer grants or interest-free funding. This is money you don’t have to repay—perfect for startups or businesses looking to innovate.
- Form Strategic Partnerships: Partnering with other businesses can help you share costs, reach more customers, or even secure funding. For example, A flower shop in Kolkata partnered with a wedding planner. The planner paid for a new flower cooler in exchange for a share of wedding event sales—a win-win.
Don’t ignore everyday expenses. Negotiating even small costs can create big results over time. You don’t always need to borrow to grow. With smart planning and creative thinking, you can unlock cash from your existing business—no bank required.
The Pros and Cons of Using Debt in Your Business
Taking on debt is a bit like ordering a spicy biryani—it can be satisfying if handled well, but too much can leave you sweating. Let’s look at the key advantages and risks so you can decide wisely.
Why Debt Can Be a Smart Move
- Flexible Amounts: You can borrow small or large, depending on your need—₹1 lakh for a fridge or ₹20 lakh to open a new shop.
- You Stay in Control: Unlike bringing in investors, loans let you keep 100% ownership of your business. No need to share profits or decision-making.
- Accelerates Growth: The right investment—like a ₹5 lakh loan for a delivery bike—can increase your revenue and more than cover the interest you pay.
Why Debt Needs Caution
- Your Assets Are at Risk: If you can’t repay, lenders can take the collateral—whether that’s your equipment, shop furniture, or even personal savings.
- Payment Pressure: Loan payments don’t stop during slow seasons. Whether sales dip during the monsoon or a festival brings fewer customers, you still owe money every month.
- Loan Restrictions: Some lenders set limits on how you spend or take on new loans. It’s like having a cautious parent watching how you manage your money.
Debt can help your business grow faster—but only if you use it carefully, with a clear plan and steady income. Understand both the rewards and responsibilities before you commit.
Final Thoughts: Make Debt Your Partner in Growth
Debt is like a trusty scooter for your business journey—it can take you far if you ride carefully. Start small, borrow only for assets that grow your business, and explore options like bank loans, leases, or government schemes. Work with a financial expert to navigate loans and taxes, ensuring you avoid bumps in the road. With smart planning, you can turn your kirana shop, chai stall, or tailoring business into a thriving success, serving customers across India.
Ready to take the next step? Plan carefully, borrow wisely, and let debt fuel your dreams, not weigh you down. Your business journey is just beginning—make it a great one!
