Debt vs Equity Funding for SMEs in India: Which Is Smarter for Your Business

Posted on October 22, 2025 by MergerDomo

Debt vs Equity Funding for SMEs in India: Which Is Smarter for Your Business

Debt funding means borrowing money and repaying with interest, while equity funding means selling ownership for capital.

For most Indian SMEs, debt funding remains the smarter, faster choice — it preserves ownership and takes less time to process.
Let’s break it down 

 1. What Is Debt Funding?

Debt funding allows your business to raise capital by borrowing from banks, NBFCs, or private financiers — repaid over time with interest.

Common SME Debt Options

• Term loans for expansion
• Working capital limits (OD/CC)
• Invoice or bill discounting
• Equipment or machinery loans
• Project or trade finance

According to Business Standard (Jun 2025),

Credit to MSMEs in India crossed ₹ 40 trillion in FY 2025, growing nearly 20% year-on-year — proof that debt remains the backbone of SME growth.

Advantages

• You retain 100% ownership
• Interest payments are tax-deductible
• Predictable repayment schedule builds discipline

Challenges

• Regular repayment pressure
• Collateral or guarantee may be required

Example:
A Pune-based manufacturing SME with ₹ 15 Cr turnover raised ₹ 2 Cr in working capital via an NBFC through MergerDomo — improving cash flow without giving up equity.

2. What Is Equity Funding?

Equity funding means selling a part of your company’s ownership (shares) to investors in exchange for capital.
It’s ideal for high-growth or early-stage startups needing patient capital and mentorship.

Common investors: angel networks, venture capital funds, private equity firms.

Advantages

• No repayment obligation
• Strategic guidance and networks from investors

Challenges

• Ownership dilution
• Decision-making power may reduce
• Exit expectations add long-term pressure

According to Tracxn via Business Standard (Jun 2025),
Indian startups raised USD 4.8 billion in H1 2025, down 25% YoY — showing how equity capital can be cyclical and slower compared to debt.

3. Debt vs Equity — Side-by-Side Comparison

4. How to Get Debt Funding via MergerDomo

MergerDomo simplifies SME funding in 4 quick steps:

1️. Share your requirement – Fill our Debt Funding Form
2️. Get matched – We connect you with trusted banks, NBFCs, and private financiers
3️. Compare offers – Review interest rates, tenure, and terms
4️. Finalize – Submit documents and close funding confidently

Documents Required

• Last 2 years’ audited financials
• Bank statements
• GST returns
• KYC & business registration

Under Government guidelines (PIB, 2025), banks must provide loan decisions within 14 working days for SME loans up to ₹ 25 lakh — showing policy support for faster approvals.

5. How to Choose Between Debt & Equity for Your SME

The RBI FAQ on MSME Lending confirms that banks can sanction composite loans up to ₹ 1 crore (term + working capital) — making debt a flexible option for SMEs.

6. India’s SME Funding Landscape 2025

• MSME credit = ₹ 40 trillion, growing ~20% YoY (Business Standard, 2025)
• MSME share in total bank lending: 17.7%, up from 15% last year (IBEF, 2025)
• Credit gap: ₹ 30 lakh crore (≈ USD 112 bn) still unmet (IAMAI × GetVantage Report 2023)
• Interest subvention: 2% rebate for GST-registered MSMEs (RBI Scheme)
• SME count: 6.3 crore units (31% manufacturing, 36% trade, 33% services) (Equifax 2023 Report)

These numbers confirm: debt funding dominates SME finance in India, supported by government incentives and strong lender appetite.a

7. Key Takeaway

• Debt funding = control + discipline
• Equity funding = mentorship + long-term growth

If you’re an established SME with consistent cash flow, debt is faster, cheaper, and smarter — and MergerDomo makes it effortless.

Start Your SME Funding Journey