Debt vs Equity: How Growing Indian Companies Should Fund Growth

Sudhir Singal · 16 Oct 2026

Most founders think of fundraising as raising equity from investors. But equity is usually the most expensive money a growing business can take, because you pay for it with a share of everything the company will ever be worth. Debt, used well, can fund growth without giving up ownership. Used badly, it can sink a business that was otherwise doing fine. The skill is knowing which one fits which need.

The basic difference

• Equity is money in exchange for a share of the company. You don't repay it and there's no interest, but you give up ownership, often some control, and a share of future profits and exit value.
• Debt is money you borrow and repay with interest. You keep your ownership, but you commit to fixed repayments whether business is good or bad, and lenders usually want security, covenants or both.

When equity makes sense

• You are pre-revenue or losing money heavily. Lenders need to see how they will be repaid. Without steady cash flows, equity is often the only real option.
• The money funds uncertain bets. Building a new product, entering a new market or a long R&D cycle carries risk that equity investors are paid to take, and lenders are not.
• You need more than money. The right investor brings networks, hiring help and credibility for your next round.
• Growth needs to be very fast. If winning the market depends on spending ahead of revenue, equity gives you room without monthly repayments.

When debt makes sense

• You have predictable cash flows. Steady revenue and positive unit economics let you service debt comfortably.
• The need is short-term or self-liquidating. Working capital, inventory and receivables turn back into cash, so they are naturally suited to debt.
• You are funding assets. Machinery, vehicles and equipment can be financed against the asset itself.
• You want to stretch your equity. Debt alongside an equity round can extend runway and let you raise the next round at a higher valuation, which means less dilution.

Debt options available to Indian companies

Working capital loans (cash credit and overdraft)

Bank and NBFC limits drawn against your inventory and receivables. These are the most common form of business debt, best for day-to-day cash needs.

Term loans

Fixed loans repaid over a set period, used for capital expenditure, expansion or acquisitions. Usually needs collateral or a track record of profits.

Invoice discounting, factoring and TReDS

Turn unpaid invoices into cash within days. TReDS platforms (government-regulated platforms for financing MSME invoices to large buyers) often offer competitive rates because the risk sits with the buyer.

Venture debt

Loans to venture-backed startups, usually raised alongside or soon after an equity round. They typically come with warrants (a small option to buy equity) and are sized as a share of the equity raised.

Revenue-based financing

Repayments are a percentage of monthly revenue, so they flex with your sales. This suits businesses with recurring or online revenue.

Government-backed schemes

Credit guarantee schemes such as CGTMSE (the Credit Guarantee Fund Trust for Micro and Small Enterprises) help eligible MSMEs borrow from banks without full collateral.

How to compare the true cost

The interest rate on a loan is easy to see. The cost of equity is harder to see, but it is usually far higher. If you sell 20% of your company to raise ₹10 crore and the company is later worth ₹500 crore, that capital has cost you ₹100 crore of value. A loan at, say, 14% a year would have cost a small fraction of that. Debt carries a different cost, though: the risk of being unable to repay in a bad year.

Total cost of debt = Interest + Fees + Cost of collateral and covenants

Before you borrow, stress-test your cash flow. Check whether you can still meet every repayment if revenue falls 20 to 30% or collections slow down. Lenders will look at your debt service coverage ratio (cash available for debt repayment divided by the repayments due), and so should you.

Mistakes we see founders make

• Funding long-term needs with short-term debt. Using a working capital line to fund capex or losses creates a repayment crunch.
• Raising equity for working capital. Giving up ownership to fund receivables and inventory that debt could have financed more cheaply.
• Ignoring covenants. Financial covenants and personal guarantees can bite hard if performance dips. Read them closely and negotiate them.
• Approaching lenders unprepared. Lenders want clean financials, cash flow projections and a clear repayment plan. A weak pitch gets expensive terms or a no.
• Waiting until cash is nearly gone. Both investors and lenders give better terms to companies that aren't desperate.

The right answer is usually a mix

Most well-funded growing companies use both. Equity pays for risk and long-term growth, and debt pays for working capital, assets and bridging gaps. The right mix depends on your stage, cash flows, growth plans and how much control you want to keep. Getting this capital structure right can save founders a meaningful share of their company.

How ImpactCFO helps

Our team has raised over ₹1,000 crore in debt from banks and NBFCs and advised companies on equity and debt fundraising. We help you decide what to raise and when, build the financial model and lender or investor materials, and negotiate terms.

Related: How to Calculate Your Cash Runway, and 5 Ways to Extend It · How to Reduce Debtor Days: A Working Capital Playbook for SMEs