Sources of Funds

Do you also have dreams of starting your own business? You will definitely learn more about it in the upcoming sessions but let’s use this lesson to understand the sources of funds to start a new venture.

Personal Source: The most widely followed source for financing your startup or business is personal source. It can be saving, cash insurance, early retirement funds etc. 

Friends & Relatives: In this option we look for funds from our friends and relatives. Usually they receive ownership, interest or equity in the startup. 

Angel Investors: 

These are the individuals & businesses that are interested in helping small businesses survive & grow. 

Government Grants & Programs: Central & state governments often give financial assistance in the form of grants or tax credits for startups & expanding businesses. 

Loan from Banks

You can also avail loan from the bank when you are in need of money. Let’s learn more about it.

Key Difference between Public & Private Sector Banks: 

  • Processing Fee: Private Banks in most of the cases channelize their customers  via Direct Selling Agents (DSA’s). These agents charge fees to source the  customers, which the banks ultimately charge from the customers in one form  or another. The Public Sector Banks charge comparatively lower interest rates  as their sourcing of customers has a direct approach.

  • Processing Time: If you need the funds urgently, go to a private bank.  They disburse loans faster, to meet their targets and deadlines.

  • Efficiency: Private sector banks score better than that of public sector banks in  terms of service and efficiency. In public banks, the effort is much more from a  borrower’s side.

  • Prepayment: A public bank gives an applicant the flexibility to pre-pay as per  his/her wish. However, in the case of a private bank, an applicant can start pre-  payment only after 6 months from the date of disbursement.

Types of Loan For Startup Businesses

Line of Credit: No need to pay the interest on the borrowed  amount for the first 9 – 15 months. It gives relaxation to the  entrepreneurs who struggle in the initial phases of establishing the  business. It is in similar lines with Credit Cards, where the borrower  is required to pay the interest for the amount used.

Equipment Financing: This kind of loan demands to put up the  collateral as security. This enables a lender to charge at lower  interest rates but with a relatively high risk. The advantage of this  loan is that the borrower is eligible to claim the tax benefit for the  depreciation of the equipment. Both these types of loans need a  high credit score.

Installment Loan: This means to borrow a lump sum amount all at once. A startup business must have following things to avail this loan: 

  • Collateral

  • Good Credit Score

  • Business Plan

  • Additional Guarantees

The loan is paid in both principal and interest amounts. The interest amount is calculated from the day when the contract is signed and it remains until the closure of the loan. Also there are few other loans like Term Loan, Account Receivable Loan, Commercial Loan etc. 

Various Government Schemes for Startups

(Note: this information was gathered in May 2021, please check the status to know the current status of these schemes)

Standup India: 

An initiative to instill a sense of entrepreneurship among SC, ST & Women Communities. They can avail loans ranging from Rs. 10 Lac to 1 Cr.

Pradhan Mantri Mudra Yojana:

This scheme provides working capital and term loan to all kinds of manufacturing, service and trading sectors including agricultural activities. 

This scheme was launched in the year 2015.

Loans are offered in three categories: 

  • Shishu

  • Kishore 

  • Tarun

Amount usually ranges from Rs. 50,000 to Rs. 10,00,000.

Sustainable Finance Scheme:

Under this scheme the funding is available for businesses working in green energy, renewable energy, technology hardware, and non-renewable energy. This is SIDBI (Small Industries Development Bank of India) to enhance sustainable development. 

Bank Credit Facilitation Scheme: 

National Small Industries Corporation (NSIC) aims to meet the requirements of MSME units in an easy way.  Usually, the loan is offered for a tenure ranging from 5-7 years, but in  special cases it can also be extended till 11 years. Credit facilitation is  offered through many banks, some of which are mentioned below –

  • IndusInd Bank

  • Vijaya Bank

  • Yes Bank

  • Federal Bank

  • Kotak Mahindra Bank

This is like a loan though the terms are on the easy side and if you go to a Government bank, the charges would be less than a private bank however the processing of loan would be slow.

Credit Guarantee Scheme (CGS): 

These are suitable for both kinds of  businesses – those who are in the initial phases, and also those who require  funds to expand their businesses. It includes service and manufacturing sector  industries; however educational, institutional, agriculture, and retail trade are  excluded from applying for this scheme. Under this scheme, a business loan of  up to ₹ 2 crores can be raised.

Coir Udyami Yojana: 

The primary aim of this scheme is to set up coir units  across India. This Coir Board heads this scheme, and the fund’s project costs up  to ₹ 10 lakhs. The rate of interest will be at par with the base rate. The total lending fund should not exceed 25% of the total cost of the project.

National Bank for Agriculture and Rural Development (NABARD): 

NABARD is  focused on providing refinance to lending institutions in rural areas. The bank  aims to provide and regulate other facilities that help to promote and develop  agriculture, cottage, small industries, handicrafts, and village industries. 

Atal Incubation Centre (AIC) 

Started by the NITI Aayog in 2016, AIC is an innovative funding scheme to promote entrepreneurs by covering their capital operational costs. The selected startups will be granted funding up to Rs 10 crore over a period of five years. Students, researchers or newly formed organisations from fields including transport, health, energy, education, agriculture, water and sanitation can apply. The AICs can be set up either in Public funded institutions or Private sector funded institutions or in Public-Private Partnership (PPP) mode. 

The candidate will have to provide at least 10,000 sq. ft of space for the infrastructure such as laboratory and workshop facilities, utilities, support services, pre-incubation services, networking, mentoring and other facilities within a period of six months from the date of release of funds for capital and operational expenditure.


In 2017, the Department of Science & Technology (DST) introduced the New Generation Innovation And Entrepreneurship Development Centre (NewGen IEDC) programme. 

The programme is implemented by the Entrepreneurship Development Institute of India (EDII), Ahmedabad. It promotes “knowledge-based and technology-driven start-ups” through mentorship, guidance and support. Key features are:

  • The NewGen IEDCs are established in academic institutions where students can work on innovative projects over a period of five years. 

  • In its first year, the DST was successful in establishing 14 NewGen IEDCs. 

  • A one time cost of Rs 25 lakh will be granted in phases. 

  • The institution should be a University/Deemed University or a premier Institute/College offering Engineering, Technology, Science courses at degree level or above for at least 5 years.

  • They must provide a space of about 5000 square feet for housing the NewGen IEDC with basic amenities like electricity, water, telephone and internet connectivity

You can read about more government schemes by scanning this QR Code:



1) Pradhan Mantri Mudra Yojna was launched in the year _______?

a) 2014

b) 2015

c) 2016

d) 2017

2) What is the maximum amount a person can receive in Pradhan Mantri Mudra Yojana?

a) Rs. 1,00,000

b) Rs. 5,00,000

c) Rs. 15,00,000

d) Rs. 10,00,000

3) The maximum loan a person can avail through Standup India Scheme?

a) 10 Lac

b) 40 Lac

c) 60 Lac

d) 1 Cr

4) Atal Incubation Center was started by __________?

a) Department of Commerce

b) Niti Aayog

c) Ministry of Finance

d) Home Ministry

5) Under Credit Guarantee Scheme a Business Loan of upto _____ can be availed?

  1. 1Cr

  2. 2Cr

  3. 3Cr

  4. 4Cr

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