In 2023, SNRas Systems, a social enterprise, came to Villgro, a support organisation for social enterprises, with a problem that had nothing to do with their business model. They had 19 patents in aquaculture technology, contracts with retail chains, and a clear path to scale. What they lacked was INR 50 lakh in working capital to expand to new markets. Every bank they approached said the same thing: insufficient collateral.
This is a familiar scenario for anyone working with impactful early-stage businesses in India. Social enterprises in agritech, clean energy, waste management, or sustainable materials routinely find themselves stuck because the financial system has not learned to see them yet. When it comes to the philanthropic sector, the instinctive response has been to give more grants. But over the years, we have come to know that grants deployed in the same way produce the same result: subscale businesses.
Our experience at Villgro, across a portfolio of 12 enterprises (in rural income resilience, urban water, and waste infrastructure) suggests a different response: an improved sequencing of instruments through which capital reaches enterprises, instead of additional grants.
The limits of a single instrument
India’s philanthropic capital pool is growing. CSR alone accounted for nearly INR 35,000 crore in FY 2023-24 and is projected to hit INR 1.2 lakh crore by 2035.
Yet most CSR capital continues to flow through a single instrument – the grant – rather than a variety of catalytic instruments.
For social enterprises, grants are essential and undeniably the right instrument in the pre-revenue, model-validating and proof-of-concept stages. But a grant deployed at the wrong stage delays the financial discipline and credit history that commercial lending requires.
The result is enterprises remain dependent on grants beyond the point—typically when they need INR 50 lakh to INR 2 crore—where debt would have built a stronger foundation.
The challenge, then, is not to move enterprises away from grants altogether, but to help them transition from one form of capital to the next at the right time, with the right support at each stage.
A three-stage pathway: what funders must do
The financial instrument is only one part of the equation. What also matters is the ecosystem that enables enterprises to move from one form of capital to the next. Successful transitions from grant dependence to commercial creditworthiness tend to follow a three-stage pathway, with each stage requiring a distinct instrument.
Stage one: Grants for enterprise readiness
The first stage is about building the foundation by validating the business model, building lender-ready documentation, establishing financial discipline, and demonstrating market traction.
For instance, Raheja Solar, a solar drying technology enterprise that aims to improve farmer incomes, faced the challenge of farmers lacking the capital needed to purchase their product. Without solving this, their solar dryers had no credible market.
Villgro’s grant and mentoring funded the market-building work with connections to farmer producer organisations and women’s cooperatives across three states to build early traction. This involved sensitising potential customers to the solution, building trust through demonstrations, and showing that the technology could generate income.
As the first set of customers adopted the solution and saw results, they also became ambassadors who could help build confidence among subsequent customers. This early traction helped Raheja Solar demonstrate demand and move towards commercial debt as a viable instrument.
CSR has a large role to play in this stage by supporting incubators and accelerators which identify social enterprises and provide the technical assistance needed to address barriers to business growth and predictability.
Stage two: Guarantees for commercial credibility
The second stage is the critical bridge, and is often missing. Enterprises that have demonstrated viability cannot access formal debt because they lack credit history, collateral, or lender familiarity with their sector.
A first-loss default guarantee (FLDG) is one instrument that commits a third party to absorb the first portion of any loss, thereby giving the lender the confidence to evaluate the enterprise on its merits rather than its collateral. This guarantee can unlock significantly more capital than the guarantee itself, while helping enterprises build the credit history that is important for scaling.
By creating guarantee facilities at a portfolio level, rather than structuring them around individual loans, this approach can also be replicated across enterprises.
Across our portfolio, guarantees facilitated by Villgro in partnership with various donors have unlocked 3x to 10x in commercial debt for every rupee of guarantee capital deployed.
Consider Carbon Masters India, which simultaneously addresses methane emissions, fossil fuel dependence, and soil degradation through the production of compressed biomethane gas and organic manure.
When Villgro first engaged them in 2021, Carbon Masters was cash strapped, unable to build a pilot plant for want of project finance and working capital. An FLDG-backed loan of INR 30 lakh from Caspian Debt created the financial discipline and demonstrated reliable cash flows. Within the guarantee window, Carbon Masters secured a purchasing agreement with an Indian Oil-–Adani JV, moved to profitability, and demonstrated demand from over 20 commercial users.
Stage three: Commercial capital without a guarantee
In this stage, enterprises graduate to accessing commercial capital without any philanthropic backstop. This requires the intermediary to actively present repayment data and enterprise performance to lenders, translating the track record built in stage two into language that commercial institutions understand.
In the case of Carbon Masters, within four years of the guarantee-backed loan, it was raising INR 3–5 crore independently from NBFCs, and development finance institutions without the need for a guarantee. The enterprise had expanded to four plants across three cities, and sales had scaled eight times.
Spectrus Sustainable Solutions offers perhaps the clearest illustration of this graduation effect. Despite eight years of operations, a brand on Amazon and inbound B2B orders, they were unable to borrow without collateral.
Villgro facilitated an INR 1 crore FLDG-backed loan through NABKISAN (a NABARD subsidiary). Spectrus repaid ahead of schedule, then secured INR 2.5 crore from HDFC Bank at 9.5 percent interest with no guarantee required.
Funders need to follow the enterprise through to graduation, because graduation is proof that the intervention has worked.
That HDFC extended credit without a guarantee is less surprising than it appears. The repayment record from the FLDG-backed loan functioned as a behavioural substitute for collateral. Banks that cannot price asset-light businesses can price demonstrated cash flow and repayment history. The FLDG loan created exactly this record where none existed before. The philanthropic capital lifted the veil on a creditworthy business that the financial system was not yet equipped or incentivised to recognise.
Funders and intermediary organisations both have a role to play through this transition. Funders need to follow the enterprise through to graduation, because graduation is proof that the intervention has worked. If an enterprise does not graduate, this should prompt learning: is the barrier specific to the enterprise, or is it a systemic one that needs to be addressed? This can help funders and intermediaries determine whether further support or a different intervention is needed.
The leverage that sequencing creates was visible in the numbers for SNRas Systems. The INR 50 lakh FLDG-backed working capital loan they raised helped unlock their capacity to expand into live fish supply chains and new retail markets. Revenue jumped from INR 6 crore in 2023 to INR 87 crore by 2025. The enterprise has since raised over INR 100 crore in debt and equity from multiple institutions without requiring a guarantee. It is worth noting that this trajectory reflects multiple factors, including a strategic acquisition; but access to working capital at a critical stage of growth set things in motion.
Lessons we learnt that are transferable
Three observations from these experiences seem transferable to other intermediaries, CSR funders, and philanthropists working with similar enterprises.
First, the instrument must match the stage. A guarantee deployed before the enterprise can service debt can be crippling. A grant deployed when the enterprise is ready for debt but still receiving grants delays the financial discipline that creditworthiness requires. Sequencing the right capital in the stack is a good strategy.
Second, a guarantee without accompanying technical assistance does not change the system. The guarantee covers the lender’s downside; technical assistance (TA) is what makes the downside unlikely.
Across our portfolio, TA operated at three levels simultaneously: building enterprise readiness (financial systems, documentation, cash flow demonstration), building market confidence (demand-side work, offtake partnerships, distributor networks), and building lender familiarity with the sector. These are inseparable functions. A guarantee programme that funds only the instrument and not the ecosystem around it is, in effect, a slightly more efficient grant.
Third, graduation should be defined before deployment, not discovered afterwards. The philanthropic guarantee is explicitly designed to bridge the enterprise to market solutions. This ‘sunsetting’ logic of building towards a defined handoff point is what makes the guarantee programme more accountable and the capital more recyclable.
What each actor can do, differs
The roles of CSR donors and philanthropic funders are not interchangeable. They have different risk appetites, funding objectives, and compliance requirements, and can therefore play different roles in building this capital stack.
CSR donors can work with incubators and accelerators to provide the technical assistance enterprises need, while philanthropic donors can provide longer-term capital for guarantee facilities that can support multiple loans over time.
Schedule VII of the Companies Act, 2013 allows companies to consider certain contributions to eligible government-backed incubators as part of their mandatory CSR spending. For example, Villgro, as a technology business incubator recognised and supported by the Department of Science and Technology, is one such intermediary. This creates a route for CSR funding to support the incubation and growth of technology-driven social enterprises.
What strikes us most, looking across these enterprises, is how rarely the problem was the business.
Philanthropic funders or organisations that support entrepreneurship must be more nuanced in how they use grants to support enterprises. While grants carry no repayment risk, it is important to identify businesses that are ready to take on debt and help them transition to guarantee-backed loans that can reduce the risk of borrowing.
For social enterprises, the counsel is to resist the gravity of grant dependency past the point of readiness—the transition to debt is uncomfortable, but it builds the financial accountability that makes subsequent capital progressively cheaper and more available.
What strikes us most, looking across these enterprises, is how rarely the problem was the business. SNRas had the technology and the market. Spectrus had the customers and the track record. Carbon Masters had the partnerships and the environmental thesis. None of these were fundamentally risky businesses but had small gaps and risk perception mismatches that the financial system could not yet assess how to price and underwrite.
The grant-only model treats enterprise potential as non-existent and to be solved through more giving. The guarantee model treats the potential as a signal to be amplified through sequenced capital. The difference is consequential and shapes whether an enterprise develops the habits of commercial accountability such as regular repayment, financial reporting, and lender relationships, that make future capital progressively cheaper and more available.
India’s capital pool of CSR and philanthropic donors is large enough to do this. With CSR grant funding for technical assistance and philanthropic capital for guarantees, there is a need to build a capital stack in which grants and guarantees unlock commercial capital.
The enterprises, in our experience, are ready to make that journey. It is time for the funders who support them to travel with them and to change instruments along the way.
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Know more
- Read this report to understand how blended finance can help social enterprises overcome funding gaps and access the capital they need to scale.
- Read this article to know what social entrepreneurs want from impact investors.
